From avocados to autos, US tariffs on Canada, Mexico could drive inflation

The 25 per cent tax that President Donald Trump plans to slap on imports from Canada and Mexico as soon as Saturday could drive up the price of everything from gasoline and pickup trucks, to Super Bowl party guacamole dip.

The tariffs would also invite retaliation. Doug Ford, the premier of Ontario, has already vowed to counterpunch by pulling American alcohol off store shelves in the Canadian province no idle threat; Canada is the world's No. 2 market for America's distilled spirits (behind the 27-nation European Union). 

 

Trump's tariffs threaten to blow up the trade agreement he himself negotiated with America's neighbours in his first term. His US-Mexico-Canada Agreement the fairest, most balanced, and beneficial trade agreement we have ever signed into law", Trump once declared -- was supposed to bring predictability to North American trade, giving businesses the confidence to make investments. 

But when it comes to the self-proclaimed "Tariff Man", Trump and his passion for plastering taxes on foreign goods, nothing is predictable, and nothing is ever really settled.

Tariffs at those levels and at that scope would effectively destroy the agreement that Trump himself negotiated and always brags about,' said Scott Lincicome, a trade analyst at the libertarian Cato Institute.

The president says the 25 per cent levies are designed to pressure America's two neighbours to do more to stop the flow of undocumented immigrants and fentanyl into the United States.

Michael Robinet of S and P Global Mobility and many other analysts suspect the tariff threat is also designed to get Canada and Mexico to go along with America's demands for changes to the USMCA when it comes up for renewal next year.

Robinet, executive director of automotive consulting at S and P Global, said he doubts that Trump will go ahead with 25 per cent across-the-board tariffs on Canadian and Mexican imports what he calls a shock-to-the-system' approach that would freeze the North American economy in a Tariff Winter".

Instead, Robinet said, Trump might postpone or phase in the tariffs or initially exempt some industries to show Canada and Mexico how much worse things could get if he doesn't get his way.

Trump pressured Mexico and Canada into agreeing to the USMCA five years ago, partly to narrow the United States' big trade deficit the gap between what the U.S. sells and what it buys.

It hasn't worked out that way.

The US deficit in the trade of goods of Mexico has widened from $106 billion in 2019 to $161 billion in 2023 (the last full year for which numbers are available). That is partly because Mexico has replaced China, locked in an ongoing trade war with the United States, as the source of many US imports furniture, textiles, shoes, laptops, computer servers.

The trade gap in goods with Canada has ballooned, too: From $31 billion in 2019 to $72 billion in 2023. The deficit largely reflects America's imports of Canadian energy.

The USMCA has not met the goals that Trump set forth for it. Our trade deficit with Canada and Mexico is bigger than it was, considerably,' said Lori Wallach, director of the Rethink Trade programme at the American Economic Liberties Project and a longtime critic of America's free trade pacts. A lot of jobs have been offshored to Mexico since USMCA.'  When the USMCA comes up for renewal next year, the US is expected to press for rules that would do more to encourage factories to produce in the United States. And it could seek a crackdown on Chinese goods being sent through Mexico to the United States to evade tariffs that Trump and President Joe Biden imposed on Beijing.

The United States now does far more business exports and imports alike with both Canada and Mexico than it does with China. In 2023, US trade of both goods and services with Canada and Mexico came to more than $1.8 trillion, compared with $643 billion with China. Because of USMCA and the regional trade deal it replaced in 2020 most products cross the region's borders tariff-free.

The threatened 25 per cent tariffs are causing heartburn in corporate boardrooms. If Trump goes ahead with his threat, tariffs would surge from $1.3 billion to $132 billion a year on Mexico's imports to the United States and from $440 million to $107 billion on Canada's, according to the tax and consulting firm PwC.

And no one knows if Trump will really pull the trigger or how long the tariffs would stay in place if he does. It's really thrown industry into this turmoil of anxiety, said trade lawyer Chandri Navarro, senior counsel at Baker and McKenzie. What industry likes is certainty. You're making production decisions, supply chain decisions, purchasing decisions five years out.'  Trump views tariffs as a fix-it for most of what ails the economy. He says they raise money for cuts in income and corporate taxes, encourage companies to move production to the United States and offer useful leverage in pressuring other countries to make concessions on trade and other issues.

Trump administration officials also say critics of potential tariffs shouldn't view them in isolation, arguing that their other policies, including lowering taxes and easing regulations, will strengthen the economy.

Companies are scrambling to prepare. Some bought goods and shipped them to the United States ahead of time to beat the tariffs. Others are calculating how much of the cost they can pass along to their customers. Unfortunately, it's going to impact a lot of consumers,' said Dave Evans, co-founder and CEO of Fictiv, a San Francisco company that helps clients manage their supply chains in plastics and metals. We saw this in his first term. A tariff isn't fully absorbed by the companies.'  Canada and Mexico are bracing, too. Chrystia Freeland, the former finance minister who represented Canada in USMCA negotiations, has called for retaliation if Trump moves ahead with tariffs. Being smart means retaliating where it hurts, said Freeland, who is running to replace prime minister Justin Trudeau. Our counterpunch must be dollar-for-dollar and it must be precisely and painfully targeted: Florida orange growers, Wisconsin dairy farmers, Michigan dishwasher manufacturers, and much more.

Likewise, Mexican President Claudia Sheinbaum promised in November that for every tariff, there will be a response in kind'.