Over three decades ago, the United States entered a free-trade agreement with Canada and Mexico, building on the idea that uniting with these prosperous economies would enhance America’s own economy as well. But this week, President Trump decided to shift gears dramatically. He introduced a sweeping 25 percent tariff on around $1 trillion worth of goods that Canada and Mexico export to the U.S. annually, all under the North American trade framework. These tariffs are poised to hike the costs of Canadian and Mexican exports, potentially driving their economies toward a recession.
In unraveling years of economic connection, Trump’s move brings forth significant concerns about the future of North American relationships and the industries that heavily rely on this economic cohesion. While some Canadian and Mexican factories might relocate to the U.S. to bypass tariffs, the new levies will also burden American consumers and manufacturers who have grown dependent on North America’s integrated supply channels.
“This marks a shift where the U.S. no longer views trade as a mutual advantage but rather as a weapon in economic disputes,” noted Edward Alden, a senior fellow with the Council on Foreign Relations. He remarked that the tariffs signal a real threat to the economic stability of our closest allies.
President Trump hinted on Wednesday that this scenario might last for some time, granting automakers just a month to adjust to the incoming tariffs under the U.S.-Mexico-Canada Agreement (USMCA). According to Trump’s officials, further tariffs on Canada and Mexico are expected next month as part of new “reciprocal” tariff actions.
In his address to Congress, President Trump defended these tariffs, framing them as protective of American jobs and the nation’s spirit. “We’re making America wealthy and powerful once more, and the changes will come swiftly,” Trump stated, acknowledging a brief disruption but downplaying its potential extent.
Economists, however, are raising alarms about the potential upheaval in Canada and Mexico, economies heavily tied to the U.S. Trade represents a quarter of U.S. economic activity, yet about 70 percent in Mexico and Canada, with approximately 80 percent of their exports directed towards the U.S. Meanwhile, less than a third of U.S. exports head to these two nations.
Tony Stillo of Oxford Economics anticipates dire consequences for Canada, forecasting a recession, inflation peaking near 4 percent, and rising unemployment rates due to the tariffs. “Trump’s trade measures could severely strain U.S.-Canada relations and North America’s production and supply networks, causing lasting damage,” he explains.
Similarly, Marcus Noland from the Peterson Institute for International Economics estimates a potential two percentage-point drop in Mexico’s growth, likely leading to numerous factory closures and job losses. Early effects are already pushing businesses to consider alternatives outside Mexico.
Randy Carr, CEO of World Emblem, a manufacturer of labels and emblems, has started contemplating establishing a secondary factory in the Dominican Republic while retaining operations in Mexico. He admits the ongoing threats have forced him to reconsider future expansions and hiring plans.
Amidst this turmoil, U.S.-based businesses face rising costs, risking closure as profits dwindle under the new tariffs. Analysts from S&P Global Ratings predict the tariffs to slash U.S. GDP by 0.6 percent over the next year and force a 2 to 3 percent decline in Canadian and Mexican GDPs.
Ironically, these tariffs strike a blow to a trade deal President Trump hailed in 2020 as a benchmark for fairness and balance. Breaking it impacts company investments and could turn previously profitable ventures into losses.
Major American automakers have thanked the president for temporarily pausing the tariffs, though privately, they warned that tariffs on vehicles and parts from Canada and Mexico would devastate their profits by imposing billions in extra costs.
Further straining diplomatic ties, the tariffs have fractured trust between the involved governments. Despite Canada and Mexico ramping up border security and tackling drug cartels in cooperation with U.S. demands, these relationships have seen significant setbacks.
Prime Minister Justin Trudeau labeled the tariffs as unjustified and potentially aimed at collapsing Canada’s economy. His warning was clear: conflict with Canada will yield no winners.
Though some groups support Trump’s tariff strategy, arguing it would unravel undesirable economic integration, others warn it could backfire, undermining U.S. manufacturing and eliminating jobs. The National Council of Textile Organizations voices concern that tariffs on neighbors might drive benefits to Asian markets instead, jeopardizing U.S. textile lines.
Bringing to mind the original North American trade agreement deliberations of the 1990s, which spurred debates about its impacts on jobs and economic growth, these new tariffs remind us of both NAFTA’s past benefits and its flaws. Economists like Harvard’s Gordon Hanson once saw NAFTA spurring industrial efficiencies, yet with significant losses among lower-income workers. NAFTA may have expanded the U.S. economy, but it left a swath of disgruntled workers in its path—now Trump’s supporters.
Ironically, Hanson notes that undoing free trade agreements may replicate the disruptions those deals initially caused. Even if U.S. manufacturing rebounds, some factories dependent on cross-border supply chains in Canada and Mexico might shutter, hinting at further regional economic challenges.
In this unfolding trade drama, significant disruptions await, with potential long-term adverse impacts lingering on both sides of the border.
