Supply Chains in Question as Trump Threatens Tariffs on North American Neighbors
Incoming US President Donald Trump has proposed the application of a 25 percent tariff on all imports from Canada and Mexico on his first day in office, sparking concerns over possible economic implications.
“On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders,” Trump posted on his Truth Social platform, adding that the move was spurred by worries over illegal drug imports and immigration.
Canada and Mexico are America’s closest trading partners, with both being integral to the US-Mexico-Canada Agreement (USMCA). They account for significant portions of US imports in critical sectors, from energy to automobiles.
Analysts are already predicting widespread economic disruption if the tariffs are implemented, with Canadian and Mexican leaders raising concerns about the implications for trade relations and resource exports.
Canada and Mexico’s close ties to the US
Canada exported US$587 billion in goods globally in 2022, relying heavily on the US as its primary trading partner. In total, 74.5 percent of the country’s exports are destined for the US market.
Overall, the country’s top exports for that year included crude petroleum (US$123 billion), cars (US$29.4 billion), petroleum gas (US$24.3 billion) and refined petroleum (US$17.2 billion).
Canadian crude oil alone accounts 62 percent of US crude imports. Canadian officials argue that tariffs on such goods could disrupt supply chains and inflate costs for businesses and consumers across North America.
Mexico also has a strong trade relationship with the US, exporting US$421 billion worth of goods to the country. Its overall top exports include cars (US$48.4 billion), computers (US$39.3 billion) and crude petroleum (US$38.2 billion).
Lose-lose situation for all countries involved
Canadian responses to Trump’s comments focus on the economic losses for all parties involved.
Deputy Prime Minister Chrystia Freeland and Public Safety Minister Dominic LeBlanc issued a joint statement on X, formerly Twitter, emphasizing the importance of maintaining the integrity of cross-border trade.
‘Canada and the United States have one of the strongest and closest relationships — particularly when it comes to trade and border security. Canada places the highest priority on border security and the integrity of our shared border,” they said in a post issued on Monday (November 25).
Read the joint statement from @cafreeland and me:
//
Lisez la déclaration conjointe de @cafreeland et moi: pic.twitter.com/g9unlJrOEe
— Dominic LeBlanc (@DLeBlancNB) November 26, 2024
Prime Minister Justin Trudeau also addressed the issue, revealing that he had spoken with Trump to stress the significance of the USMCA in fostering stable trade relations.
‘This is a relationship that we know takes a certain amount of working on, and that’s what we’ll do,’ he said.
Mexican President Claudia Sheinbaum echoed this cautionary sentiment, saying, ‘To one tariff will follow another in response and so on, until we put our common businesses at risk.’
Tariffs to impact inflation, currencies
The automotive sector in particular stands out as a critical area of concern. The US imports the majority of its cars and car parts from Canada and Mexico, with Mexico surpassing China as the top exporter to the US in 2023.
The tariffs could lead to increased vehicle prices and production delays, impacting automakers and consumers alike.
The proposed tariffs come at a time when US businesses are already grappling with inflationary pressures and labor shortages. Analysts warn that additional tariffs could exacerbate these challenges by driving up costs.
The Peterson Institute for International Economics estimates that Trump’s broader tariff proposals could cost the average US household over US$2,600 annually, a figure that may rise further with the inclusion of Canada and Mexico.
The potential impact on currency markets has also been noted.
Following Trump’s announcement, the Canadian dollar and Mexican peso both experienced immediate declines against the US dollar, although partial recoveries were observed in subsequent trading sessions.
As the US’ trade partners seek to establish a compromise, analysts are warning that the economic costs of such tariffs could extend beyond North America, impacting further global supply chains and consumer markets.
The coming months are likely to see intensified discussions between US, Canadian and Mexican officials as they seek to establish a middle ground to avoid an all-out breakdown in their relationship.
Securities Disclosure: I, Giann Liguid, hold no direct investment interest in any company mentioned in this article.