How Trump tariffs could affect the United States, Canada and Mexico

Decades of trade integration in North America are on the brink of major disruption due to tariffs that President Trump says he wants to impose on Canada and Mexico, the United States' main trading partners.

And while the tariffs are expected to harm all three countries, they would cause more damage to Canada and Mexico, smaller economies deeply dependent on the United States.

Officials in both countries breathed a brief sigh of relief on Monday when Mr. Trump did not include the tariffs in his storm of executive orders on his first day in office. But the relief was short-lived: Later in the evening, Mr. Trump told reporters that he still planned to keep the tariffs in place.

We're thinking 25 percent for Mexico and Canada, Mr. Trump said in the Oval Office. I think it's good to do it on February 1st.

Trade experts are weighing whether the tariffs will materialize or whether the threat alone is just a negotiating tactic aimed at extracting concessions from Mexico and Canada. Both countries avoided high tariffs under the first Trump administration, and both are betting that the United States needs Mexico and Canada to take on China, a much bigger rival.

Economists and policymakers say the tariffs would cause lost revenue and jobs and force consumers to pay more for many products.

Mr. Trump signed an executive order on Monday directing federal agencies to conduct a comprehensive review of U.S. trade policies, which could lead to further actions against Mexico and Canada.

Mr. Trump's promised tariffs would most likely result in retaliatory measures from Canada and Mexico and undermine tightly integrated production lines and supply chains across North America.

Items worth more than $1.5 trillion are believed to be at stake, the total value of all goods traded between the United States and Canada, and between the United States and Mexico. (This is the total value of these trade relationships for 2023, the most recent available, according to U.S. government data.)

Economists predict that the initial effect would be negative for the three countries, linked by a free trade agreement known as the USMCA (United States-Mexico-Canada).

This negative effect is difficult to translate into concrete figures: not only is it unclear which products Mr. Trump would target and how Mexico and Canada would react, but the consequences can evolve over time, including an increase in inflation as goods become more expensive. , job losses and a slowdown in spending as consumers worry about diminishing incomes.

And governments often intervene to mitigate some of these negative effects. Canadian government officials have already said they will consider bailing out businesses and supporting workers most affected.

But certain sectors would be quickly disrupted: agriculture, automobiles and energy suppliers, pillars of the three economies, would be disrupted by general customs tariffs.

UNITED STATES

Some industrial sectors in the United States might welcome a 25 percent tariff on products from Canada and Mexico, for example American producers of tomatoes and other seasonal fruits and vegetables who have difficulty compete with their Mexican counterparts.

But most industries would be hit hard by the economic disruption caused by such high tariffs.

Even groups that would prefer more protection from Mexican exports, such as U.S. auto workers, could be harmed if tariffs suddenly shut down auto supply chains. The United Auto Workers and the United Steelworkers International Union also extend across the Canada-US border and have members in Canada, meaning they generally oppose any restrictions on Canadian exports .

Given that the United States is the largest economy in North America and the least dependent on trade, the proportional effect on the U.S. economy would be less than on the Mexican or Canadian economies.

But tariffs would raise prices for consumers and add inflation. American households and businesses could expect to pay higher prices for a variety of products subject to tariffs, including avocados, beer, steel, cars and oil.

These higher prices would discourage purchases and most likely end up slowing the economy. Researchers at the Peterson Institute for International Economics in Washington estimate that a 25% tariff on all exports from Mexico and Canada would reduce U.S. gross domestic product by about $200 billion over the life of the second Trump administration. .

U.S. industries that export to Canada and Mexico would also be hurt if those countries reverse course and impose tariffs on U.S. products. The Canadian government plans to target Florida orange juice, Tennessee whiskey and Kentucky peanut butter, while the Mexican government develops its own retaliatory plans.

Canada

The trade relationship between the United States and Canada is characterized by striking facts that highlight the close economic, industrial and commercial ties between the two countries.

Some $2.5 billion worth of goods are traded across the border every day, representing an $800 billion trade relationship annually.

For the auto industry, the border between the United States and Canada can often seem inconsequential, as a single vehicle crosses up to eight times before being fully assembled.

Canada exports 80 percent of its oil to the United States, which gets half of its imported oil from Canada. And Canadian energy powers homes and businesses across the United States, particularly in New England, where Quebec exports hydroelectric power.

And Canada sends other essential products to the United States, such as potash, used to make fertilizer, and uranium, needed for nuclear power production.

If Mr. Trump imposes tariffs, the impact will depend on their magnitude or whether certain Canadian products, such as oil, are exempted. But the consequences for Canada could be devastating.

Economists predict a loss of economic output of 2 to 2.6 percent per year. More than a million jobs in Canada are at risk, including around half a million in the auto industry in Ontario, according to the province's premier, Doug Ford.

If tariffs were imposed on Canadian energy and Canada retaliated by limiting oil exports, the effect would be felt across the country, particularly in Alberta, the hub of Canada's oil exports.

Alberta's provincial leader has rejected a federal government plan that would use oil as leverage to pressure the Trump administration to reverse the imposition of tariffs.

Mexico

Mexico stands out among major economies for its reliance on trade with the United States, sending about 80 percent of its exports to its neighbor, most from factories operating within a 30-mile radius. the border.

Because these factories are primarily aimed at the U.S. market, Mexico is much more vulnerable to tariffs than a large industrial economy like Germany, which can more easily redirect its exports to a wide range of different markets.

Tariffs of 25 percent would be ruinous for Mexico, said Marcus Noland, executive vice president and chief academic officer at the Peterson Institute for International Economics.

In fact, it would begin a process of deindustrialization of Mexico, he said.

Mr. Noland estimated that such tariffs could reduce Mexico's economic output growth by about 2 percentage points, which could lead to large-scale factory closures and job losses. The auto industry, which employs more than a million people in Mexico and relies heavily on complex supply chains transporting parts across the border, could be particularly vulnerable.

Other sectors of the Mexican economy could come under severe pressure from high tariffs. Automobiles, computers, cables, telephones and medical instruments are among Mexico's largest exports.

Agriculture is another weak spot for Mexico, which supplies 63 percent of U.S. vegetable imports and 47 percent of its fruit and nut imports. These tariffs could hit iconic products like avocados, whose demand has skyrocketed from American consumers since the United States began importing them from Mexico.

Mexico's ability to soften the tariff shock is also limited due to fiscal challenges, said Kimberley Sperrfechter, emerging markets economist at Capital Economics in London, citing a budget deficit in 2024 that has reached its highest level since. decades.

The tourism industry is one sector of the Mexican economy that could benefit from tariffs. If tariffs are imposed, the country's currency, the peso, could weaken, Ms. Sperrfechter said, and make Mexico even more attractive to American tourists, who represent the country's largest group of international visitors.

But, she added, this is unlikely to offset the hit to other sectors.

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