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Canada and Mexico at Risk of U.S. Tariffs

On January 20, U.S. President Donald Trump announced his plans to follow through on a previous proposal to enact tariffs of up to 25% on Canada and Mexico. These tariffs could be enacted as early as February 1. The measures are intended to force the governments of Canada and Mexico to take action against mass migration at U.S. borders and the large-scale import of drugs, such as fentanyl, into the U.S. As of January 27, it remains unclear which products will be affected, as officials are reportedly considering multiple tariff structures that could include universal tariffs or more targeted measures. The Trump administration has also not come to a decision on whether to implement tariffs immediately or provide a grace period following an official announcement on February 1. On January 22, Trump also proposed an additional 10% tariff on China, citing the country’s role in fentanyl manufacturing. 

In response, both the Canadian and Mexican governments have vowed to implement counter tariffs if President Trump moves forward with the restrictions but have also continued to communicate through diplomatic channels to dissuade him. Officials from both countries have suggested the tariff proposal could be a negotiating tactic and is unlikely to be implemented due to the high domestic cost within the U.S. Nevertheless, the Trump Administration appears to be moving forward with its plan and has not outlined specific steps each government could take to stop the implementation of tariffs. 

Tariffs could have dire impact on U.S.-Mexico trade 

Mexico’s economy is heavily dependent on exports to the U.S., with approximately 80% of its exports directed to the American market. Mexico is also the number one source of imports into the U.S., accounting for almost 16% of U.S. imports. In particular, the automotive and agricultural sectors appear poised to be most impacted by any trade restrictions. The U.S. and Mexican automotive sectors are highly interconnected, with many Mexican-made vehicles and automotive components designated for import into the U.S. While the degree of interdependencies differs, automotive parts can cross the border between Mexico, the U.S., and Canada multiple times before a vehicle is fully assembled. In the agricultural sector, the U.S. supplies major inputs such as grains and fertilizers to Mexico, while the latter is a major supplier of fresh fruits and vegetables to the U.S. 

While Mexican President Claudia Sheinbaum has promised to enact counter tariffs, she has not specified what goods would be affected and has stated that she would prefer to a confrontation through negotiating with the Trump Administration. When President Trump threatened to enact a 5% tariff on Mexican goods in 2019, the Mexican government privately warned that targeted counter tariffs would be implemented, but ultimately Trump’s tariff plans were canceled. In advance of President Trump’s inauguration, Sheinbaum recently stepped-up domestic raids on drug producers, and has highlighted significant decreases in recent months to migrant numbers at the border. 

However, significant disagreements persist related to border security. In his first days in office, President Trump passed several policies related to restricting migration at the southern border, including attempting to reinstate his so-called “Remain in Mexico” program, which forces migrants to remain in Mexico while awaiting the results of their legal cases. Trump has also reiterated threats to designate Mexican cartels as foreign terrorist organizations. Sheinbaum’s administration remains strongly opposed to this designation amid fears that it could embolden Trump to increase military threats against Mexico or otherwise impede on Mexican sovereignty. Trump’s current focus on taking a more direct approach to border security issues could see relations with its southern neighbor deteriorate, making a political agreement to avoid trade restrictions more challenging. 

Threats of U.S. tariffs puts several Canadian industrial sectors at risk of business disruptions 

In addition to potential tariffs on Mexico, President Trump has also threatened to impose the same measures on goods moving across the country’s northern border with Canada from February 1. Tariffs of any kind could have a profound impact on both economies given that the U.S. is currently Canada’s biggest trading partner, while Canada is the United States’ second largest trading partner after Mexico. Canada is also the United States’ largest foreign supplier of aluminum and steel, and roughly a quarter of all oil consumed in the U.S. every day is imported from Canada. Other sectors considered to be particularly exposed to business disruptions due to U.S. tariffs include the automotive, lumber, and mining sectors. In total, approximately $ 2.5 billion (€ 2.4 billion) worth of goods and services moves across the U.S. – Canada border per day. Recent estimates suggest that, depending on the extent of tariffs and counter tariffs, Canada’s gross domestic product (GDP) could fall by more than 5% as a result. 

Like in the dispute with Mexico, President Trump had initially linked the potential tariffs to the Canadian government’s failure to stop the flow of illegal migrants and drugs across its border into the United States. In response, the Canadian Government has since announced plans to invest around C$ 1.3 billion ($ 900 million / € 866 million) into securing its southern border, which seems to have limited success in stopping the tariff threat so far. In addition to beefing up border security, it remains somewhat unclear how authorities in Canada intend to respond to the implementation of new tariffs. 

The Canadian Government has reportedly been working on a three-stage plan involving retaliatory tariffs and other trade restrictions targeting U.S. goods worth between C$37 billion ($25.82 billion / €24.65 billion) and C$150 billion ($104.64 billion / 99.75 billion €). A range of consumer goods are reportedly expected to be targeted, including goods such as orange juice from Florida, whiskey from Tennessee and peanut butter from Kentucky. Canadian authorities are also said to be considering measures that would target more sensitive Canadian exports to the U.S., including hydroelectric power supply from Quebec Province that is needed for power generation across the U.S. region of New England. New export taxes on critical commodities such as uranium and potash are also rumored to be on the table. Canada’s outgoing Prime Minister Justin Trudeau has suggested that his country would even be willing to go as far as tax or impose an embargo on oil exports to the U.S. but some local political leaders, particularly in Canada’s oil rich province of Alberta, appear far less keen on using energy exports as a bargaining tool. 

Despite these rumored retaliatory measures, it remains unclear whether authorities in Canada will be able to form a coherent response to any tariffs imposed by the Trump Administration. Ongoing domestic upheaval following the resignation of Prime Minister Trudeau earlier this year and an expected election in the coming months will likely complicate efforts to work with the new administration or retaliate against any trade measures announced by it. 

Likelihood of tariffs on Canada and Mexico remains unclear as deadline approaches 

Even if these tariffs are not ultimately enacted, rocky trade relations and possible new trade restrictions are likely across North America in the coming months. A recent political disagreement over deportation flights carrying migrants from the U.S. to Colombia saw President Trump threaten to impose tariffs on goods from Colombia as well. President Trump rescinded his threat almost immediately after the Colombian government agreed to comply with his demands, but the interaction may offer a glimpse into how the U.S. government could wield the threat of new trade restrictions as a political bargaining tool during the next four years. Alongside these announcements, Trump enacted an executive order mandating a broad review of U.S. trade policy, including unfair trade practices, currency manipulation, and technology controls due by April 1. This review could eventually lead to additional tariff announcements. Additionally, officials within the Trump Administration have hinted that Trump hopes to accelerate a renegotiation of the United States-Mexico-Canada Agreement (USMCA), which is currently scheduled for July 1, 2026. If enacted, the newly announced tariffs directly violate the terms of USMCA, raising concerns that the parties could nullify the agreement altogether. However, the USMCA might not be at an immediate threat of dissolution as it remains unclear whether the Trump Administration will decide to enforce new tariffs right away or give authorities in Canada and Mexico a grace period before the new measures go into effect. 

With the political and economic situation between the United States and its northern and southern neighbors likely to remain uncertain in the coming months, those doing business in the region should prepare for potential business disruptions in a wide range of manufacturing sectors such as automotive, agriculture, energy, mining, electronics and pharmaceuticals. 

 

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