The new executive orders, signed on February 1, 2025, will impose a 25% tariff on goods from Canada and Mexico, effective February 4, 2025. Canada, the U.S.‘s largest trade partner, will see its energy exports, including oil, natural gas, and electricity, subject to a 10% tariff. Similarly, a 10% tariff will be applied to Chinese imports.
While the U.S. government asserts that these tariffs are a means of protecting national security and curbing illegal immigration, the economic consequences of these measures are far-reaching and complex. Canada’s Prime Minister Justin Trudeau and Mexico’s President Claudia Sheinbaum wasted no time in announcing retaliatory tariffs. Canada plans to impose a 25% duty on $155 billion worth of American goods, and Mexico is preparing its own set of retaliatory actions, though these have yet to be fully outlined.
The Economic Weight of Retaliation: Data Insights on the Impact of Tariffs
To better understand the potential economic impact of these tariffs, it’s important to look at the data surrounding trade flows between these nations.
Canada-U.S. Trade Relations:
- In 2023, Canada exported over $400 billion worth of goods to the U.S. This includes energy exports, which make up approximately 20% of Canada’s total export value.
- The 10% tariff on Canadian energy exports could lead to a loss of up to $40 billion in trade revenue. Given that Canada is the largest supplier of oil to the U.S., any disruption in this flow could also increase energy prices in the U.S., further straining the economy.
Mexico-U.S. Trade Relations:
- Mexico is the U.S.’s second-largest trading partner. In 2023, trade between the two nations totaled over $600 billion.
- Mexican exports to the U.S. include automobiles, electronics, and agricultural products, which could be subject to the new tariffs. For instance, Mexico exports over 2 million cars annually to the U.S., making up roughly 10% of total U.S. car sales. A 25% tariff on these vehicles could lead to a price increase of up to $3,000 per car.
U.S.-China Trade:
- The 10% tariff on Chinese imports will impact consumer goods, electronics, and machinery. In 2023, U.S. imports from China amounted to $550 billion.
- A 10% tariff on this volume could raise U.S. consumer costs by approximately $55 billion annually. This could exacerbate inflation, especially in tech and home goods sectors, further adding pressure to American households.
The Economic Ripple Effect: Increased Prices and Job Losses
Data analysis suggests that the overall economic impact of these tariffs will likely be felt in various sectors, particularly those dependent on cross-border trade. Consumer prices are expected to rise, especially in industries like automotive, agriculture, and electronics, where imports from Canada, Mexico, and China are critical.
- Automobiles: The 25% tariff on Mexican auto imports could increase vehicle prices by as much as $3,000 per car. With approximately 17 million cars sold annually in the U.S., this would add an estimated $51 billion in costs to U.S. consumers.
- Agriculture: Both Canada and Mexico are key suppliers of agricultural products to the U.S. Canada alone accounts for nearly 30% of U.S. vegetable imports. Retaliatory tariffs on these products could lead to a 10-15% price increase on everyday grocery items, potentially pushing inflation higher.
- Energy: A 10% tariff on Canadian oil could increase gasoline prices by up to 20 cents per gallon. Given that U.S. consumers use over 8 million barrels of oil per day, this could translate into a $1.6 billion increase in daily fuel costs for Americans.
What’s at Stake: Potential Economic Downturn and Unemployment
The retaliatory tariffs will likely cause a ripple effect on employment in sectors reliant on trade with these countries. Industries like automotive manufacturing, agriculture, and energy could see job losses, as higher prices and reduced demand stifle production.
- Automotive Sector: If tariffs result in a 10% decline in car imports from Mexico, it could cause the loss of around 50,000 U.S. jobs in the auto manufacturing industry, a sector already under pressure from automation and shifting global demand.
- Agricultural Jobs: As retaliatory tariffs on U.S. farm products take hold in Mexico, U.S. farmers could lose up to $5 billion in export revenues. This could lead to job losses in the agricultural sector, which employs over 2 million people in the U.S.
A Global Trade War: Will Diplomatic Solutions Emerge?
With retaliatory measures in place, the U.S. is facing a tense standoff with its two closest trade partners. While President Trump maintains that these tariffs are essential for national security, the economic data suggests that the costs could be steep for U.S. consumers and businesses. The likelihood of further escalation remains high, with potential long-term consequences for trade relations, inflation, and employment.
Interesting Read
As Canada and Mexico continue to adjust their tariffs, the coming weeks will reveal whether a diplomatic resolution can be reached or if this trade war will escalate further, disrupting North America’s delicate trade balance.
