Trumps 25% tariffs on Canada and Mexico will be a blow to all 3 economies

The trading relationship between the U.S., Mexico, and Canada is the most important set of trade relations for all three countries. Canada and Mexico are the United States’ first and second largest export markets with goods exports of $680 billion in 2023, and the U.S. is the largest export market for Canada and Mexico. Exports among the U.S., Mexico, and Canada support over 17 million jobs.

The trading relationship among the U.S., Canada, and Mexico is underpinned by the United States-Mexico-Canada Agreement (USMCA), a new trade agreement that replaced NAFTA and was negotiated and finalized during the first Trump administration. Yet, on February 1, 2025, President Trump imposed 25% tariffs (which were subsequently delayed for Mexico by one month) on imports from Canada and Mexico and 10% tariffs on energy imports from Canada to address flows of fentanyl and illegal migration. Mexico and Canada have indicated they are preparing retaliatory tariffs , and Trump has stated that he will raise U.S. tariffs further in response. The difference in the negative economic impact from the current 10% tariff on energy imports versus a 25% tariff is relatively small. And given that Canada and Mexico look almost certain to retaliate, likely leading to even higher U.S. tariffs, the following assesses the impact of across-the-board 25% tariffs.

The impact of these tariffs on trade across North America will be particularly impactful, not only because of the large volume of trade that is involved, but also because of the importance of supply chains, which comprise around 50% of intraregional trade. For example, in the production of a Chevy Silverado or Dodge Challenger, components cross borders multiple times before being assembled into a final product. As a result, imposing a 25% tariff every time a product crosses borders adds up quickly.

The following presents the results of simulations based on the Global Trade Analysis Project (GTAP) model under two scenarios. The first scenario assesses the economic impacts on the U.S., Mexico, and Canada with the U.S. imposing across-the-board 25% tariffs on imports from Mexico and Canada with no retaliation from Canada or Mexico. The second scenario assesses the impact of Canada and Mexico retaliating with 25% tariffs on U.S. imports. All economic impacts are estimated to occur over the medium term (i.e., over the next three to five years). Given that U.S. tariffs on imports from Mexico and Canada under USMCA are in most cases close to zero now, a 25% tariff will have significant negative economic shocks for the U.S., Mexico, and Canada. In both scenarios, the economic impact is more severe for Mexico and Canada because a much larger share of their trade is with the U.S.—83% of Mexico’s exports and 78% of Canada’s exports go to the U.S., whereas around one-third of U.S. exports are destined for Canada and Mexico. That said, the economic hit to the U.S. is substantial, with some sectors in particular standing to contract significantly.

These tariffs will also harm the Trump administration’s goal of developing more secure supply chains and competing with China. Continuing to make progress here will require greater trade and investment across North America to strengthen and diversify existing supply chains and reduce reliance on China-centered supply chains. The tariffs are directly at odds with deeper economic integration across North America. In fact, China will benefit from a trade war across North America, as it undercuts efforts to reshore supply chains away from China. More broadly, because these tariffs are most likely inconsistent with USMCA, they signal to the world that any international agreement with the U.S. is not worth all that much, raising difficult questions for all U.S. allies and trading partners about the value of trade agreements with the U.S. One result is that countries will start to hedge—creating new options for trade and investment to insure against an unreliable U.S., which will include being more open to expanding trade and investment relations with China.

Impact of tariffs on economic growth 

Figure 1 shows that tariffs would reduce U.S. GDP growth by around 0.25 percentage points, and with retaliation, U.S. GDP growth falls over 0.3 percentage points. With U.S. GDP in 2024 of approximately $23.5 trillion, this amounts to an estimated loss of U.S. economic output over the medium term of around $45 billion from the 25% on imports from Canada and Mexico, and this rises to about $75 billion in lost economic output should Canada and Mexico retaliate. As can be seen, losses to economic growth for Canada and Mexico are around 1.15 percentage points from the 25% U.S. tariffs, and this increases to over 3 percentage points should they both impose 25% tariffs on U.S. imports.