Mexico, Canada weigh potential consequences of Trump tariffs DW 12/12/2024

Canada and Mexico are grappling with U.S. President-elect Donald Trump's threat to impose 25% tariffs on exports to their most important trading market, with both governments weighing their approaches.

Trump said he would sign executive orders implementing the tariffs on his first day back in office. He linked the problem to what he says is the failure of Mexico and Canada to prevent illegal migration and drug trafficking across U.S. borders.

Economists say tariffs would be very damaging to both Canada and Mexico, with the latter being particularly vulnerable.

“Mexico is really tied to the U.S. economy, and any trade dispute will hurt both economies a lot, but it will hurt Mexico a lot more than the U.S.,” said Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics. DW.

Trump considers new tariffs on Canada, China and Mexico

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Wendy Wagner, an international trade lawyer with Ottawa-based Gowling WLG, said the tariffs would cause serious problems for Canada.

“It seems very unrealistic and damaging to impose 25% import duties on your main export market,” she told DW.

Divide and conquer

Tariff threats have caused tensions between Mexico and Canada.

During a meeting with Trump at his Florida base last month, Canadian Prime Minister Justin Trudeau reportedly tried to convince Trump that Canada should not be lumped in with Mexico on drug or border issues.

Trudeau and Sheinbaum exchanged barbs over their respective approaches to border and drug issuesImage: Presidencia/ZUMA Press/IMAGO

Mexican President Claudia Sheinbaum said Canada has “a very serious problem with fentanyl,” adding that “Mexico should not be used in election campaigns,” referring to the upcoming Canadian election.

Sheinbaum had a phone call with Trump, after which she said, “There will be no potential tariff war.” She said she had given assurances to Trump regarding migration initiatives and drug trafficking.

Schott said he believed Trump's strategy was to deal separately with countries and undermine the so-called United States-Mexico-Canada Agreement (USMCA), a free trade agreement negotiated in during his first term and which succeeded the old NAFTA pact.

“Trump likes to negotiate bilaterally,” he said. “So he’s not going to treat this as a North American issue.”

There has been speculation that Canada may seek to strike its own bilateral deal with the United States Image: Sean Kilpatrick/The Canadian Press/empics/picture alliance A new deal or no deal?

Politicians in some Canadian provinces have argued that Canada should enter into its own agreement with the United States, excluding Mexico. For his part, Trudeau said he supported the USMCA and that maintaining it was his “first choice.” But he hinted at alternative options “while awaiting the decisions and choices that Mexico has made.”

Bill Reinsch, senior economic adviser at the Center for Strategic and International Studies, said he believed tariffs on Canada and Mexico remained in the “threat category” and stressed that the USMCA needed to be renegotiated in 2026.

“It's inevitable. Either way, they have to deal with it,” he told DW. “At best, Trump will bring forward the negotiations by a year, but it will still be the same negotiation. It's complicated because the threat concerns drugs and migrants. It's not a question of trade.”

Donald Trump linked the trade issue to drug trafficking Image: Teun Voeten/Sipa/picture alliance From threat to reality

If tariffs moved from threat to reality, there is no doubt that they would present enormous challenges to the Canadian and Mexican economies.

Nearly 75% of Canadian exports were destined for the United States in 2022, according to the MIT Economic Complexity Observatory Index, highlighting how costly tariffs could be for Canada.

“It's a very high number, but it's even more important because Canada is an exporting economy,” Wagner said. “There is not a huge domestic market. Most Canadian companies go into business with the hope of exporting.”

Canada exports a wide range of goods and raw materials to the United States, from oil and gas turbines to lumber and automobiles. Wagner said an additional factor in this relationship is the interdependence of their supply chains, particularly in the automotive industry.

Trump forced Mexico and Canada to renegotiate the NAFTA trade deal. Are the days of the USMCA also numberedImage: Ron Przysucha/ZUMA/IMAGO Mexican dependency

Mexico is even more dependent on the United States as an export destination, with 77% of its goods going there in 2022, according to the MIT Index.

The auto sector is particularly strong, and Schott noted that tariffs would make cars more expensive for American consumers.

“This will not be a boon for American production, because the companies that will be affected by the tariffs affecting Mexico are those that also produce in the United States. These costs will be passed on to the American consumer,” he said. he declared. said, adding that tariffs on Mexico could make one of the problems Trump is trying to solve, which is migration, even worse.

“The damage to the Mexican economy only worsens economic conditions in Mexico and encourages more illegal migration to the United States,” Schott said. “I am not sure that this factor is properly taken into account in the proposals of the new Trump administration.”

Idle threat or serious risk?

In the event of tariffs, retaliation from Mexico and Canada would be likely, according to Reinsch, who noted that the Mexican president had already said she would implement tariffs.

“I think the political situation in Canada would probably force them to do the same, which would be hugely disruptive to all three economies and extremely inflationary,” Reinsch said.

There is still some optimism that Trump's negotiating style, making threats before reaching a deal, means the tariffs will not pass.

Wagner said she was hoping for a different solution to the problem, noting that “tariffs are actually a very imperfect solution.”

Still, the fact that Trump imposed tariffs on steel and aluminum from Canada and Mexico prompted Schott to take this new threat seriously: “He did it, and he would be willing to start again in the right circumstances. »

Edited by: Uwe Hessler

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