US Economy to Suffer from Tariffs on Canada and Mexico
The sudden rise in trade costs is set to transform supply chains across three North American nations. Given Trump's previous actions, further retaliation is anticipated. As a result, stakeholders will need to exercise greater caution when selecting trade partners to mitigate risks in this unstable trading environment.
TroibNews 
**Editor's note:** Zhou Mi is a senior research fellow at the Chinese Academy of International Trade and Economic Cooperation, under the Chinese Commerce Ministry. The article reflects the author's opinions and not necessarily the views of CN.
The North American Free Trade Agreement successfully integrated trade between the US, Canada, and Mexico in 1994. Its 2020 update to the United States-Mexico-Canada Agreement marked a departure from the earlier terminology, as it dropped the word “free.” Despite requiring concessions on market access, Canadians and Mexicans collectively felt relieved during Donald Trump’s first term.
Over the past three decades since NAFTA's inception, the trade relationships among these three North American nations have evolved, with each country carving out its own niche within the partnership. Trump’s previous threats to increase tariffs on imports from Canada and Mexico underscore potential shifts in trade dynamics.
For American businesses and consumers, cost remains a pivotal concern. US automakers and other manufacturers often invest in Mexico, drawn by its lower land, labor, and environmental costs. This vertical integration of industrial chains has bolstered the success of the US economy.
Historically, the US has enjoyed advantages from low production costs and tariff-free imports, benefitting investors significantly. However, the imposition of tariffs will raise the cost of imports from Mexico.
In recent years, inflation has emerged as a significant economic and social challenge in the US, contributing to rising living costs and the fragility of American society. When trade uncertainties, geopolitical tensions, or health crises arise, the availability of consumer goods and intermediate products in the US may suffer.
In such scenarios, the Federal Reserve may need to raise interest rates to curb consumer demand, which could further distort prices and heighten market anxiety.
Every nation has its own strengths and characteristics. It is unlikely that the US can marshal enough resources to replicate what Mexico can offer. Even if investors are inclined to pursue such avenues, challenges such as a lack of human resources, supporting industries, and high compliance costs could impede progress.
The minerals and metals sectors are significant for Canada, representing 21 percent of its merchandise exports. In 2023, the US was Canada’s primary destination for mineral exports, accounting for over half of total shipments. Key exports from Canada to the US include iron and steel, aluminum, gold, potash, copper, tellurium, niobium, and uranium. Many of these minerals are regarded as vital for supplying US critical minerals.
In contrast, Canada imports mainly iron and steel, gold, and aluminum from the US, with about three-quarters of these materials being processed. Alternative trading partners for these products are more readily available.
The US economy, which relies heavily on road transport, is significantly impacted by energy prices. Despite being an energy exporter, the distribution of crude oil within the US remains uneven, with energy forming the largest portion of cross-border trade between the US and Canada. Canadian exports of crude oil and natural gas are essential for states like Michigan, New York, and Minnesota.
Should Canada retaliate against additional US tariffs, the resulting increase in energy costs could create further strain for these American states.
Electricity also plays a crucial role in US imports. According to the US Energy Information Administration, the US imported 38.9 million megawatt hours of electricity in 2023, with 85.3 percent sourced from Canada. While this electricity constitutes less than one percent of total US consumption, the power transmission lines that connect the two nations comprise a complex, interconnected power grid stretching from New England to the Pacific Northwest.
As electricity demand rises—partly due to the growth of electric vehicles and artificial intelligence—energy shortages could heighten vulnerability within the US.
Both Canada and Mexico have indicated they might retaliate if faced with further US tariffs. While the volume of US exports to these countries may not match that of imports, a sudden rise in trade costs would undoubtedly alter existing supply chains.
Given Trump’s past behavior, the potential for additional retaliatory measures looms large. As trade dynamics become increasingly tumultuous, stakeholders will likely exercise greater caution in selecting trading partners to mitigate risks.
Emily Johnson contributed to this report for TROIB News
The North American Free Trade Agreement successfully integrated trade between the US, Canada, and Mexico in 1994. Its 2020 update to the United States-Mexico-Canada Agreement marked a departure from the earlier terminology, as it dropped the word “free.” Despite requiring concessions on market access, Canadians and Mexicans collectively felt relieved during Donald Trump’s first term.
Over the past three decades since NAFTA's inception, the trade relationships among these three North American nations have evolved, with each country carving out its own niche within the partnership. Trump’s previous threats to increase tariffs on imports from Canada and Mexico underscore potential shifts in trade dynamics.
For American businesses and consumers, cost remains a pivotal concern. US automakers and other manufacturers often invest in Mexico, drawn by its lower land, labor, and environmental costs. This vertical integration of industrial chains has bolstered the success of the US economy.
Historically, the US has enjoyed advantages from low production costs and tariff-free imports, benefitting investors significantly. However, the imposition of tariffs will raise the cost of imports from Mexico.
In recent years, inflation has emerged as a significant economic and social challenge in the US, contributing to rising living costs and the fragility of American society. When trade uncertainties, geopolitical tensions, or health crises arise, the availability of consumer goods and intermediate products in the US may suffer.
In such scenarios, the Federal Reserve may need to raise interest rates to curb consumer demand, which could further distort prices and heighten market anxiety.
Every nation has its own strengths and characteristics. It is unlikely that the US can marshal enough resources to replicate what Mexico can offer. Even if investors are inclined to pursue such avenues, challenges such as a lack of human resources, supporting industries, and high compliance costs could impede progress.
The minerals and metals sectors are significant for Canada, representing 21 percent of its merchandise exports. In 2023, the US was Canada’s primary destination for mineral exports, accounting for over half of total shipments. Key exports from Canada to the US include iron and steel, aluminum, gold, potash, copper, tellurium, niobium, and uranium. Many of these minerals are regarded as vital for supplying US critical minerals.
In contrast, Canada imports mainly iron and steel, gold, and aluminum from the US, with about three-quarters of these materials being processed. Alternative trading partners for these products are more readily available.
The US economy, which relies heavily on road transport, is significantly impacted by energy prices. Despite being an energy exporter, the distribution of crude oil within the US remains uneven, with energy forming the largest portion of cross-border trade between the US and Canada. Canadian exports of crude oil and natural gas are essential for states like Michigan, New York, and Minnesota.
Should Canada retaliate against additional US tariffs, the resulting increase in energy costs could create further strain for these American states.
Electricity also plays a crucial role in US imports. According to the US Energy Information Administration, the US imported 38.9 million megawatt hours of electricity in 2023, with 85.3 percent sourced from Canada. While this electricity constitutes less than one percent of total US consumption, the power transmission lines that connect the two nations comprise a complex, interconnected power grid stretching from New England to the Pacific Northwest.
As electricity demand rises—partly due to the growth of electric vehicles and artificial intelligence—energy shortages could heighten vulnerability within the US.
Both Canada and Mexico have indicated they might retaliate if faced with further US tariffs. While the volume of US exports to these countries may not match that of imports, a sudden rise in trade costs would undoubtedly alter existing supply chains.
Given Trump’s past behavior, the potential for additional retaliatory measures looms large. As trade dynamics become increasingly tumultuous, stakeholders will likely exercise greater caution in selecting trading partners to mitigate risks.
Emily Johnson contributed to this report for TROIB News
