President Donald Trump has put North America on edge with a looming threat to impose 25% tariffs on all goods from Canada and Mexico, effective February 1. This drastic measure aims to address what the administration perceives as insufficient border security. However, economists warn that such a decision could ripple through the interconnected economies of the region, causing significant disruptions.
Goldman Sachs estimates a 20% likelihood that President Trump will proceed with these tariffs. Despite this relatively low probability, the potential impact has sparked widespread concern. The Peterson Institute's researchers have labeled a 25% tariff on Mexico as catastrophic, underlining the severity of the possible economic fallout.
Canada is already preparing a comprehensive list of retaliatory tariffs targeting American-made goods, including steel, orange juice, pet food, and alcoholic beverages. Economists predict that should these tariffs come to pass, the Canadian and Mexican economies could swiftly descend into recession.
The tariffs would not only strain the economies of Canada and Mexico but would also elevate consumer prices in the United States. American consumers could face higher costs for cars, gasoline, and other imported goods. Given that Canada and Mexico supplied 71% of US oil imports in 2023, tariffs would significantly impact fuel prices. The Great Lakes region could see gas prices surge by 20 to 50 cents per gallon unless Canadian oil is exempted from the tariffs.
The Federal Reserve might respond to these economic pressures by maintaining high-interest rates for an extended period, delaying any potential relief for mortgage rates. The auto industry would be particularly vulnerable; the average cost of a car purchased in the United States could rise by approximately $3,000. Emmanuel Rosner, a senior research analyst at Wolfe Research, emphasized that such tariffs would be devastating to the US auto industry.
Desmond Lachman of the American Enterprise Institute expressed concerns over broader economic implications:
"America is not an economic island, and serious economic problems abroad could come back to harm our financial system, our export sector and adversely impact our companies’ earnings," – Desmond Lachman, senior fellow at the center-right American Enterprise Institute.
Exporting goods to the United States constitutes over 25% of Mexico's GDP, highlighting its economic dependency on trade with its northern neighbor. A trade war could devastate Mexico's economy while also dealing a blow to Canada's economy. Meanwhile, the United States, with its diversified economy, might withstand some of these punches but not without significant domestic repercussions.
The auto industry exemplifies North America's economic interdependence, treating the region as one cohesive market rather than three separate countries. A full-blown trade war could disrupt this harmony, leading to job losses and a potential housing crisis. Joe Brusuelas, chief economist at RSM, warned:
"This would be a real trade war, not a trade skirmish. This is serious. You would see job loss and people lose their homes," – Joe Brusuelas, chief economist at RSM.
President Trump remains defiant in his stance on tariffs:
"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 anybody," – Donald Trump.
Despite this firm rhetoric, some analysts remain skeptical about the actual implementation of such tariffs. Goldman Sachs economists pointed out that in 2019, Trump threatened similar tariffs on Mexico but never followed through:
“We note that in 2019 he also stated that he would impose a tariff of up to 25% on Mexico within 10 days but the tariff was never implemented,” – Goldman Sachs economists.
Heidi Crebo-Rediker from the Council on Foreign Relations suggested that the threat may serve as a strategic move to prompt action:
“Trump probably hopes the ten-day delay will crack the whip to get Mexico and Canada to act,” – Heidi Crebo-Rediker, a senior fellow in the Center for Geoeconomic Studies at the Council on Foreign Relations.
In response to the uncertainty surrounding potential tariffs, Peter Boockvar from The Bleakley Financial Group advised:
“For the sake of business certainty and visibility, particularly for small businesses, figure out what you’re doing with tariffs as quickly as possible,” – Peter Boockvar, chief investment officer at The Bleakley Financial Group.
Canadian Prime Minister Justin Trudeau has not ruled out any options in response to the tariff threats:
“Everything is on the table,” – Canadian Prime Minister Justin Trudeau.
