Why Trump's Tariffs On Mexico, Canada Are Bad News For North Americans

US President Donald Trump's long-threatened tariffs against Canada and Mexico went into effect Tuesday, putting global markets on edge and setting up costly retaliations by America's northern allies. Starting past midnight, imports from Canada and Mexico are now to be taxed at 25 per cent, with Canadian energy products subject to 10 per cent import duties.

For three decades, Ottawa and New Mexico have enjoyed a virtually tariff-free trading relationship with America. But, after the Trump administration's move, Canada responded with retaliatory taxes, with Mexico poised to follow suit. 

The impact of the trade war triggered by Trump's move sparked fears of deep repercussions for the highly integrated North American economy that depends on cross-border shipments to build cars and machinery, refine energy and process agricultural goods. Trump tariff actions could upend nearly $2.2 trillion in two-way annual US trade, according to a report by Reuters.

Recession Fears

Even before Trump's tariffs announcement, US data on Monday showed factory gate prices jumped to a nearly three-year high, suggesting that a new wave of tariffs could soon undercut production. Trump's confirmation that the tariffs would proceed sent financial markets reeling with global stocks tumbling and safe-haven bonds rallying. 

In the US, Wall Street's main stock indexes tumbled late Monday to end sharply lower. The S&P 500 lost 1.75 per cent, to end at 5,850.31 points, while the Nasdaq Composite lost 2.64 per cent, closing at 18,350.19. The Dow Jones Industrial Average fell 1.47 per cent, to 43,197.30.

Both the Canadian dollar and Mexican peso also fell against the greenback.

"Today's reckless decision by the US administration is forcing Canada and the US toward recessions, job losses and economic disaster," Canadian Chamber of Commerce CEO Candace Laing said in a statement.

She said the US tariffs will fail to usher in a "golden age" coveted by Trump but instead raise costs for consumers and producers and disrupt supply chains. "Tariffs are a tax on the American people."

Economists have warned that new American trade policies could result in rising prices, supply chain disruptions, and economic volatility.

One of the sectors likely to be impacted would be the grocery market, as the US imported nearly $10 billion worth of vegetables and over $11 billion worth of fruit and frozen juices from Mexico in 2023. Food inflation is already a major concern for Americans, and the new tariffs could add more strain on household budgets. Given that Mexico supplies the majority of America's avocados, along with a big share of beer and tequila, food prices will likely go up. 

Another area poised for disruption would be the automotive sector, which depends heavily on cross-border trade. More than half of all automotive vehicles, parts, and engines used in the US originate from Canada and Mexico.

Matt Blunt, president of the American Automotive Policy Council representing Detroit automakers, called for vehicles that meet the US-Mexico-Canada Agreement's regional content requirements to be exempted from the tariffs.

Moreover, manufacturing as a whole will also face inflation, as raw materials such as steel, aluminum, and crude oil would become more expensive. Canada was the largest exporter of industrial supplies to the US in 2023, with crude oil imports alone valued at $93 billion.

The new tariffs on these imports could make US-made products more expensive to produce, potentially reducing the competitiveness of American industries.

Canada, Mexico's Next Move

Canadian Prime Minister Justin Trudeau immediately retaliated and said Ottawa will respond with immediate 25 per cent tariffs on C$30 billion ($20.7 billion) worth of US imports, and another C$125 billion ($86.2 billion) if Trump's tariffs were still in place in 21 days. He said previously that Canada would target American beer, wine, bourbon, home appliances and Florida orange juice.

"Tariffs will disrupt an incredibly successful trading relationship," Trudeau said, adding that they would violate the US-Mexico-Canada free trade agreement signed by Trump during his first term.

Ontario Premier Doug Ford told NBC that he was ready to cut off shipments of nickel and transmission of electricity from his province to the US in retaliation.

Mexican President Claudia Sheinbaum was expected to announce her response during a morning news conference in Mexico City on Tuesday, the country's economy ministry said.

Trump's America First Agenda

Donald Trump has maintained a blistering pace of tariff actions since taking office in January, including fully restored 25 per cent tariffs on steel and aluminum imports that take effect March 12, rescinding prior exemptions.

Trump's "America First" agenda, aimed at redrawing trade relationships in favor of the U.S., is expected to be a centerpiece of his Tuesday night address to a joint session of Congress.

Trump on Saturday opened a national security investigation into imports of lumber and wood products that could result in steep tariffs. Canada, already facing 14.5% U.S. tariffs on softwood lumber, would be hit particularly hard.

A week earlier, Trump revived a probe into countries that levy digital services taxes, proposed fees of up to $1.5 million on every Chinese-built ship entering a U.S. port and launched a tariff investigation into copper imports.

These add to his plans for higher "reciprocal tariffs" to match the levies of other countries and offset their other trade barriers, a move that could hit the European Union hard.