When the US signed a free trade agreement with Canada and Mexico more than 30 years ago, the premise was that partnerships with two other prosperous economies would also benefit the US.
This week, President Trump suddenly scrapped the idea. He on Tuesday imposed a 25% tariff on the roughly $1 trillion imports that Mexico and Canada send to the US as part of their North American trade agreement each year, from walking back to them soon. On Thursday, the president signed an executive order to suspend tariffs in Canada and Mexico for goods traded under the rules of the US-Mexico-Canada Agreement.
If tariffs are maintained, it could significantly raise the costs of exports in Canada and Mexico, damaging the economy and causing a recession.
This week's cheating on Trump unleashes decades of economic integration and raises major questions about the future of an industry built around the idea of ​​a continent that is economically integrated with North America. Some factories in Canada and Mexico may have moved to the US to avoid tariffs, but taxation would have increased costs for American consumers and manufacturers who have come to rely on materials from their North American neighbours.
“This is the day the US stopped viewing trade as a force for mutual benefit and began to view it as a tool for economic warfare,” said Edward Alden, a senior fellow at the Council of Foreign Relations. He added that taxation is “a fundamental attack on the economic well-being of our nearest neighbor.”
Trump suspended tariffs on Thursday, but the relief could be short-lived. The president said he hopes to issue more tariffs in Canada and Mexico next month.
In a speech to Congress on Tuesday night, Trump defended tariffs, saying, “It's not just about protecting America's work, it's about protecting the soul of our nation.”
“Taxes are about enriching America again, making America great again, and that's happening, and it's going to happen pretty quickly,” he said. “There's a bit of interference, but that's fine. That's not that much.”
Economists argue that tariffs are so dependent on the US economy that it could cause major disruptions in Canada and Mexico. Trade accounts for about a quarter of the US economic activity, compared to about 70% in Mexico and Canada. Canada and Mexico both send about 80% of their exports to the United States, but only about a third of US exports collectively to Canada and Mexico.
Tony Stilou, director of Canadian Economics at Oxford Economics, estimated that tariffs on most of the products would cause the Canadian economy to fall into a recession this year, nearly surpassing the consumer price inflation rate of 4% the previous year, and layoffs that resulted in unemployment rates above 8%.
“Trump's trade war seriously hinders relations between the US and Canada, seriously overturns North America's highly integrated production and supply networks, and perhaps has a lasting impact on both economies,” he said.
Marcus Noland, vice president and president of research at Peterson Institute for International Economics, estimates that a 25% tariff on Mexican exports could reduce Mexico's economic growth by 2 percentage points, resulting in massive factory closures and job losses.
The economist warns that Trump's unpredictable trade approach – that he announced tariffs, then delayed them, enacted them, and all stopped within a few weeks, is likely to relax his investments as he waits for what the terms of trade will turn out.
World Herald Coat of Arms Randy Carr, who manufactures labels and emblems that include US military uniforms, FedEx drivers and National Football League players, said that the threat of tariffs has rethinked plans for the next three years and pulled back all spending on expansion and employment.
“We're sitting in many of the projects that we can't otherwise be able to do as a result of the tariff threat alone,” he said. “Everyone is sitting in his hand, waiting for the next thing to happen.”
In addition to the Mexican factory, Mr. Kerr said the tariffs also provided impetus to establish secondary factories in the Dominican Republic. He said that if tariffs are maintained, he would consider bringing manufacturing to the US, but would take time and significantly increase the costs of his products.
As a bigger economy, the US is more segregated to trade than Canada and Mexico. However, slowing down America's biggest export markets would also undermine US growth and create more severe pain among communities that rely on those markets. Canada and Mexico are the largest export markets for many American farmers.
The US industry, which relies on raw materials from neighboring countries, also has a rise in costs, and some companies could close as tariffs erase profit margins. Analysts at S&P Global Ratings said on Thursday that Trump proposed tariffs in Canada and Mexico estimated that Mexico would reduce US gross domestic product by 0.6% over the next 12 months, and reduce Canada and Mexico's GDP by 2-3% from previous forecasts.
The tariffs would also effectively shatter the trade deals Trump himself signed in his first term. When he signed the trade deal in 2020, Trump called it “the biggest, fairest, most balanced modern trade deal he has ever achieved,” and a “huge victory” for farmers and factory workers. Trump's willingness to ignore that law could cause businesses to crack down on investments, turning some of the substantial investments they made before into losses.
In a call with the president Tuesday, the leading American automaker told Trump that he would effectively erase all the profits of all businesses by placing tariffs on cars and parts in Canada and Mexico by imposing billions of dollars in new costs.
The threat of tariffs also hinders trust between the governments involved. In response to US demand, Canada closed its visa rules and deployed personnel, equipment, helicopters and drones along the border. Mexico sent its troops to the border and cracked down on drug cartels.
The border crossing has plummeted. Ultimately, it wasn't important.
Canadian Prime Minister Justin Trudeau said at a press conference Tuesday that Trump's rationale for tariffs is “completely false, completely unfair, completely false.” Trudeau said what Trump really wanted was to be “a complete collapse of the Canadian economy” in order to achieve the objectives the president has repeatedly spoken about: the annexation of Canada.
But he said these moves would also lower the US economy. “There's no winner in the fight against Canada,” Trudeau said.
Some groups supported Trump's tariffs. United auto workers, who represent primarily Americans, said in a statement that they had seen “the devastating impact of so-called free trade on the working class” for 40 years.
“I'm pleased to see the US president take positive action to end the free trade disaster that fell like a working class bomb,” the union said. “The working class suffered from all the pain of NAFTA, so we don't suffer from all the pain of revoking NAFTA.”
However, other industries complain that breaking these ties backfires Trump's goals by damaging American production and destroying work.
The National Council of Textile Organizations, a trade group representing US textile manufacturers, which advocates stricter restrictions on imports from China, said imposing tariffs on Canada and Mexico “helps China and other Asian countries, which have lost 27 plants in the past 20 months and harms the US textile industry.”
US textile manufacturers ship more than half of their global textile exports to Mexico and Canada, and these materials often return as finished products to the USMCA under the USMCA, which has destabilized this North American production chain, ” alone exacerbating the migration and fentanyl crisis,” the group said.
When negotiations began in the 1990s, the North American trade agreement was a controversial concept. The United States and Canada already had free trade agreements, but neither country had contracts with poor countries like Mexico.
Supporters believe the agreement will boost Mexico's economic growth, provide investment destinations and US export markets, while also helping to stop illegal immigration. Critics said it would steal American manufacturing jobs.
Gordon Hanson, an economist at Harvard Kennedy School, studied the impact of NAFTA and said he worked in Mexico when it was drafted. But they were wrong about it, he said, either non-university educated workers in the United States or poorer, more industrialized Southern workers in Mexico.
Overall, economic research shows that NAFTA has expanded the US economy. But it produced losers as well as winners. Many of those at the losing end felt betrayed by Democrats who fought for a free trade deal rather than a blue-collar worker, and ultimately supported Trump and his trade policies.
Hanson said NAFTA was “very disruptive in the textile industry and other labor-intensive sectors,” and that it was part of car manufacturing and was unemployed in those sectors. “The political impact of it was probably as big or as big as economic,” he added.
Ironically, Hanson said Trump's efforts to unleash free trade agreements could lead to the kind of economic dislocation that occurred in the first place when they destroy them and then replicate new supply chains.
Even if more manufacturing jobs are created overall in the US, certain factories could be shut down as they rely on supply chains passing through Canada and Mexico.
Tariffs will cause major disruption to the local economy, he said. “I'm worried about the disruptive effects of this and the negative effects of longevity.”
Jack Ewing Reports of contributions.
