Assessing Trump’s Proposed 25% Tariff on Imports from Mexico and Canada

Economic

Summary:

Whether Trump’s proposed 25% tariffs on all imports from Mexico and Canada could lead to further progress on these issues is uncertain. But it is clear that if implemented, these tariffs will harm U.S. industry.

President-elect Trump recently announced that when he begins his term on January 20, 2025 he will implement 25% tariffs on all imports from Mexico and Canada unless these countries control the flow of illegal drugs, especially fentanyl, and illegal immigrants. Trump also proposed an additional 10% tariff on imports from China due to concerns about fentanyl. Whether these proposed tariffs will address U.S. concerns around fentanyl and illegal immigration remains to be seen, but the costs of these tariffs for U.S. industry may be high enough that they will become economically and politically unsustainable. This will be even more so if Mexico retaliates, as Mexican President Claudia Sheinbaum has threatened to do. While tariffs seem justified, a tariff-first approach to addressing U.S. issues with Canada and Mexico undermines the key role of trade and investment across North America underpinned by the United States-Mexico-Canada Agreement (USMCA); the regional agreement can play an important role in reducing U.S. dependencies on Chinese-centered supply chains and in securing alternative sources of critical minerals.

First, it is important to be clear about the costs of a 25% across-the-board tariff on imports from Mexico and Canada. Various studies have confirmed that the 25% tariff on imports from China initiated by the Trump administration and then expanded by the Biden administration created costs and reduced investment. This is not to say that tariffs are never justified, but it is important to be clear about some of the costs associated with them.

Second, the proposed 25% tariffs on Mexico and Canada will be much more extensive than current tariffs on imports from China, and the impact will be more significant. Imports from Mexico and Canada are the United States’ first and third largest sources of imports respectively, worth over $900 billion in 2023, and over 17 million jobs rely on trade across North America, including over 4.5 million U.S. jobs. In addition, approximately 50% of U.S. trade with Canada and Mexico is driven by supply chains in sectors such as automobiles, medical equipment, energy, and agricultural products. This means that products cross borders multiple times as they are manufactured. The 25% tariff applied each time a product moves along supply chains will add up quickly and raise prices, rendering many of these supply chains economically unviable. This analysis does not take into account additional costs should Mexico or Canada retaliate.

The proposed tariffs are also likely inconsistent with the USMCA—the trade agreement between the U.S., Mexico, and Canada that the Trump administration successfully negotiated. USMCA is up for review in 2026, and it is possible that these tariffs are part of a broader strategy to extract concessions from Mexico and Canada in the lead-up to the review. Yet, Trump’s willingness to ignore U.S. commitments under USMCA will hamper his administration’s ability to make progress on other key challenges. Threatening 25% tariffs on Mexico and Canada has sent a signal globally that governments cannot rely on an agreement with Trump—even one that he negotiated. In response, governments will focus on one-off deals to address specific U.S. concerns, while avoiding getting drawn into agreements that are based on longer-term cooperation. This will make it more difficult to address U.S. economic and security concerns with China, which will require building more political, challenging, complex, and longer-term cooperation with other countries in areas such as export controls, investment screening, and industrial subsidies.

It is unclear whether these threatened tariffs on Mexico and China will ever materialize. However, given the threat, it is now up to Mexico and Canada to act on it. This may be a negotiating ploy, but given the potential costs the 25% tariff would pose to many U.S. industries, Trump has now placed himself in the position of relying on Mexico and Canada to act in order to avoid these harms. Addressing flows of fentanyl and illegal immigration are clearly issues that should be resolved. Whether Trump’s proposed 25% tariffs on all imports from Mexico and Canada could lead to further progress on these issues is uncertain. But it is clear that if implemented, these tariffs will harm U.S. industry.

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Assessing Trump’s Proposed 25% Tariff on Imports from Mexico and Canada

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