Trump Could Cause Immense Damage to Mexico and Canada with a Single Signature
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President Donald Trump, with the stroke of his pen, could plunge America's closest neighbors into recession.
From his first day in office, Trump has suggested he could do just that. Trump has threatened to impose 25% tariffs on all goods from Canada and Mexico on Feb. 1, in response to what he sees as inadequate border security that fails to keep drugs and migrants out of the United States.
Raising tariffs on Canada and Mexico would risk triggering a full-scale trade war in North America's deeply interconnected economies, where delicate supply chains have been tightly intertwined for decades.
It would be a risky bet for Trump, with massive implications for the entire continent - and a test for the three neighboring countries, all of which have new leadership or leadership in transition. Economists say the tariffs, if implemented, would quickly push the Canadian and Mexican economies into recession and likely lead to higher consumer prices for Americans on cars, gasoline and other imported goods.
"It would be a real trade war, not a trade skirmish." This is serious. "We're going to see job losses and home losses," said Joe Brusuelas, chief economist at RSM.
That's why some on Wall Street think Trump is bluffing. Investors are not dumping stocks. CEOs, don't panic. Economists haven't revised their growth forecasts downward.
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Ultimately, inciting a trade war in North America would undermine Trump's promises to boost the U.S. economy and tackle the cost of living.
It would risk wiping out the massive gains in the stock market, which Trump sees as a kind of real-time report. And the Federal Reserve may feel pressured to keep interest rates high for longer, preventing the easing of mortgage rates that Trump seeks.
Goldman Sachs: Tariffs unlikely
Despite Trump's threats, Goldman Sachs told clients this week that there was only a 20% chance that the president would impose a 25% tariff on Canada and Mexico.
"We note that in 2019 he also said he would impose a tariff of up to 25% on Mexico within 10 days, but the tariff has never been implemented," Goldman Sachs economists wrote.c-2025-01-21t013333z-1270679308-rc21ecase3t1-rtrmadp-3-usa-trump-inauguration.jpg
Similarly, as Goldman Sachs points out, Trump has not followed through on his November 2024 threat to impose tariffs on Canada, Mexico and China on the first day.
"I have a feeling that this will not happen." "This is red meat for the president's base," said RSM's Brusuelas.
It's entirely possible that Trump will choose not to impose tariffs on Canada and Mexico, especially if the two countries agree to open negotiations this year, rather than next year, to renegotiate the United States-Mexico-Canada Agreement (USMCA). The trade deal, which replaced NAFTA during Trump's first term, is up for review by July 2026.
"Trump is probably hoping that the 10-day deadline will crack the whip to spur Mexico and Canada to act," said Heidi Crebo-Rediker, a senior fellow at the Center for Geoeconomic Studies at the Council on Foreign Relations.
Canadian oil is the largest source of foreign crude oil for the United States. Where gas prices could rise
Another Trump promise that could be jeopardized by tariffs: cheap gasoline.
During the campaign, Trump promised to lower the price of gasoline below $2 per gallon. Analysts are skeptical that this is possible (or that Trump and the oil industry that has backed him want to), but tariffs could push gasoline prices in the other direction.
That's because Canada is the largest source of foreign oil to the United States. Canada and Mexico will supply 71% of U.S. oil imports by 2023, according to a new analysis of Trump's proposals by the Congressional Research Service. The report concludes that tariffs on Canadian and Mexican oil could raise consumer prices for gasoline, diesel and other petroleum products in the United States, especially in regions most dependent on Canadian crude oil.
If Canadian oil is not exempt from the tariffs, gasoline prices could rise by 20 to 50 cents per gallon in the Great Lakes region as refineries there rely more on Canadian oil, Patrick De Haan, chief analyst at the Energy Information Administration, told CNN. . of oil on GasBuddy.
De Haan expects a smaller, but still noticeable, impact of 10 to 30 cents per gallon in the Midwest and Rockies, as well as in the Northeast, which imports gasoline, diesel, heating oil and more and kerosene from refineries in New Brunswick and Quebec.
Motorists in other parts of the United States will likely see smaller increases in gasoline prices because there are better options to replace Canadian crude.
"It would hurt all the economies involved"
However, Trump rejected the argument that the U.S. economy depends on imports from Canada and Mexico. "We don't need them to make our cars, and they make a lot of them. We don't need their lumber because we have our own forests... We don't need their oil and gas. "We have more than anyone else," Trump said during his virtual address to business leaders in Davos on Thursday.
A 25% tariff on all goods from Mexico and Canada would shave $200 billion from U.S. gross domestic product (GDP) and $100 billion from Canada's small economy, and reduce Mexico's growth by 2%. Peterson Institute for International Economics.
"These tariffs hurt all affected economies, including the United States," Peterson Institute researchers Warwick McKibbin and Marcus Noland wrote in the analysis. The actual damage is likely even greater because of the close ties between the two nations, the researchers said.
President Donald Trump signs documents as he issues executive orders and pardons for the January 6 charges in the Oval Office of the White House on his inauguration day in Washington, D.C., Jan. 20. Car prices could rise by $3,000. For example, the auto industry treats North America as if it were one country, not three. Parts and machinery are made in factories scattered across the continent. Sometimes, auto parts cross the border multiple times before reaching a dealership. There is no such thing as an all-American car. "Tariffs of this magnitude would be devastating for the U.S. auto industry," Emmanuel Rosner, senior research analyst at Wolfe Research, wrote in a November report. Car buyers would be directly affected, with the average cost of a car purchased in the U.S. rising by about $3,000, Wolfe Research estimates. Tariffs 'catastrophic' for Mexico Economists say a diverse United States would be better equipped to withstand the blows of a trade war. Mexico, on the other hand, is more vulnerable because its economy relies heavily on exports of goods to the U.S., which account for more than 25% of its GDP.
The Mexican economy is "extremely exposed" to tariffs, said Tim Hunter, senior Latin America economist at Oxford Economics. That's why Hunter expects the tariffs to push Mexico into recession later this year. "For Mexico, a 25 percent tariff would be catastrophic," the Peterson Institute researchers said. An economic disaster in Mexico could worsen the situation at the border, a key Trump goal. The Peterson Institute report noted that the economic hardship caused by the tariffs "will increase the incentive for Mexican immigrants to cross the border illegally into the United States — directly countering another Trump administration priority." U.S. markets initially rose sharply after President Trump's election, on hopes of deregulation and tax cuts. A cloud over the economy At the same time, Canada and Mexico are unlikely to accept the U.S. tariffs without retaliating. That raises the specter of escalating violence. "Everything is on the table," Canadian Prime Minister Justin Trudeau said earlier this week. As CNN previously reported, Canada is already preparing to retaliate by imposing a list of tariffs on U.S. products ranging from steel to orange juice to pet food and alcoholic beverages like Jack Daniels whiskey. "America is not an economic island, and serious economic problems abroad can ripple through to damage our financial system, our export sector, and negatively impact our corporate profits," said Desmond Lachman, a senior fellow at the center-right American Business Institute. Meanwhile, CEOs and investors are trying to make sense of the successive tariff threats and predict what comes next. "For security and visibility reasons, especially for small businesses, you should understand what you're doing with fees as soon as possible," Peter Boockvar, chief investment officer at Bleakley Financial Group, wrote Thursday. "Right now, it's just a giant global cloud that powers businesses around the world."
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