Trump tariffs: What could they mean for Mexico and Canada?
January 30, 2025
Fulfilling another campaign promise, newly elected US President Donald Trump could be a step closer to placing a 25% tariff on goods imported from Canada and Mexico. For things from China, he plans to add a 10% tariff.
Before his inauguration, Trump announced that tariffs on Canada and Mexico were a Day-1 priority. When this didn't happen, many were relieved. Later he announced the tariffs would to go into effect on February 1.
The move, which would come just two weeks after he moved back into the White House, hits America's biggest trading partners.In 2023, Canada and Mexico bought US goods and services worth $808 billion (€768 billion), according to the US Department of Commerce's Bureau of Economic Analysis.
At the same time, Canada and Mexico sent $1.01 trillion worth of goods to the US. The US trade deficit with Canada is over $40 billion, while the trade deficit with Mexico is over $162 billion.
Using tariffs as a Trump tool
Most economist think tariffs will increase prices for American consumers. Trump hopes for a different effect.
For him tariffs are a way to cut the country's "unfair" trade deficit, add to domestic manufacturing capacity through a buy American push and generate government revenue.
Additionally, tariffs are a handy tool in other negotiations like the country's war on drugs and keeping out immigrants along the southern border.
Trump has so far refrained from implementing universal tariffs on all imports into the country, something else he threated during the campaign.
Canada and 25% US tariffs
For Canada the tariffs come at a time of political instability.
Prime Minister Justin Trudeau was quick to visit the president-elect in Florida, but Trudeau will soon be replaced after he gave up leadership of the Liberal Party.
The new Canadian leader will likely face a vote of no confidence in parliament in March or call fresh parliamentary elections him or herself. A new election will most likely put the Conservatives back in power in Ottawa, delaying any response to the new US president.
While the country is occupied with itself, it will be hard to deal with outside forces like US tariffs. This at a time when Trump has repeatedly belittled Canada saying it could become the 51st state of the United States.
Mexico and 25% US tariffs
On January 20, Trump declared a national emergency at the southern border and sent in extra military support for the Department of Homeland Security. He has also changed the name of the Gulf of Mexico to the Gulf of America, at least officially in the US.
For Mexico, fresh US tariffs are no laughing matter as its economy is intricately interwoven with the US. Still, Mexico has been assertive in its approach to its neighbor.
In November, Mexico's President Claudia Sheinbaum said that "one tariff would be followed by another." Last week, she said that she will stand up to the US while remaining constructive. "It's important to always keep a cool head and refer to signed agreements, beyond actual speeches," she announced.
On Wednesday as the February 1 deadline drew nearer, Sheinbaum said: "We don't think it's going to happen really," adding, "if it happens, we also have our plan."
Investments in Mexican manufacturing have grown since Trump's first term in office as businesses have benefited from cheap labor and the United States-Mexico-Canada Agreement, which came into force in July 2020 and replaced the North America Free Trade Agreement.
Trump, who helped negotiate the deal, now says it is "the worst trade deal ever made" and wants to renegotiate it as soon as possible. Tariff threats could push up that deadline.
Investing in Mexico instead of China
Car manufactures and Chinese companies, in particular, have also set up shop in Mexico to get around tariffs on imports directly from China.
Transforming raw materials into finished goods can mean sending things back and forth across the border — sometime multiple times. Adding a tariff each time a product crosses the US border, finished or not, would make the supply network too expensive. Production facilities could stop production.
Companies in Mexico may have to rethink their investments and where they make things. Elon Musk's planned Tesla factory in Nuevo Leon is on hold.
Mexico and Canada hope their proximity to the US and the fact that they are not China can help them. Still, both are preparing for the worst. To please Washington and stave off tariffs, both have beefed up border security to stop migrants and drugs.
Officials have also reportedly made lists of US products they could hit with counter tariffs. Canada could hold back oil and electricity exports. To keep North American borders open, Mexico could threaten to increase economic ties with China, America's archrival.
Will North America suffer together?
"The economic consequences of such tariffs would be severe for North America, potentially causing significant disruptions to growth and trade relations," wrote Julian Hinz last week.
The research director for trade policy at the Kiel Institute for the World Economy calculates this could lead to a 4.1% drop in GDP for both Mexico and Canada in the first year, since around three-quarters of their total exports go to the US.
Others, like the Peterson Institute for International Economics, say a 25% tariffs on Canadian and Mexican goods would cause pain for all three. For Canade it will be bad, but for Mexico it would be "catastrophic" since they are more dependent on the US. It would eventually drive up some prices in the US.
"For the duration of the second Trump administration, US GDP would be around $200 billion lower than it would have been without the tariffs," wrote senior researchers Warwick J. McKibbin and Marcus Noland in mid-January. "Canada would lose $100 billion off a much smaller economy, and at its peak, the tariff would knock 2% off Mexico's growth rate."
In the end, there are a lot of open questions. Will US courts strike down the tariffs, will there be retaliation or exemptions for some industries? Besides tariffs, such uncertainty is bad for business and will harm all sides in the end.
Edited by: Uwe Hessler