The blanket 25% tariff on all goods imported into the U.S. from Canada and Mexico proposed by U.S. President-elect Donald Trump would have catastrophic consequences for businesses and supply chains, according to industry analysts.
The auto industry — which across the three countries produced 16.2 million motor vehicles in 2023 — could be hit especially hard, said Michael Robinet, executive director of automotive advisory services at S&P Global Market Intelligence.
“Given how truly interconnected the supply chain and the vehicle manufacturers are within Canada and Mexico, any tariff would either, first, be short-lived, or it would snarl the industry and grind it to a halt,” Robinet said. “And you have to think both would be pretty unacceptable to the Administration.”
Trump has repeatedly said tariffs — effectively import taxes — will create more factory jobs, shrink the federal deficit, lower food prices and allow the government to subsidize childcare. Economists disagree. In September, 2024, a report from the Peterson Institute for International Economics concluded that Trump’s main tariff proposals — assuming that the targeted countries retaliated with their own tariffs — would slash more than a percentage point off the U.S. economy by 2026 and make inflation 2 percentage points higher next year than it otherwise would have been. According to Nomura, a Japanese bank, the tariffs threatened by Trump would wipe away four-fifths of the operating profit of General Motors in 2025, The Economist reported December 3.
Robinet explained during an interview December 10 that car manufacturing and distribution has been integrated between the U.S. and Canada since the signing of the Automotive Products Trade Agreement of 1965, better known as the Canada-US Auto Pact, with Mexico added into the highly complex ecosystem since the North American Trade Agreement (Nafta) came into force in 1994. In essence, the agreements created a much larger market where economies of scale made auto manufacturing far more efficient and profitable while keeping prices down. Mexico accounted for around one-fourth of the North American production volume in 2023, and Canada one-tenth, and those figures actually show how intertwined it all is, Robinet said. “You’ve got transmissions coming from Mexico, finished cars built in Canada… It would be impossible to undo, even over the mid-term. And dismantling the infrastructure would take years and billions of dollars that would not be best spent in that form,” he said. “A 25% tariff is a complete non-starter.”
Given Trump’s tendency to threaten and posture, but then back down on trade and other matters, it’s likely the tariff proposal is an opening salvo in a battle to renegotiate the existing U.S.-Mexico-Canada Agreement (USMCA) free trade deal, which is up for renewal or renegotiation in July, 2026. “That’s the elephant in the room,” said Robinet. “I think the Administration is looking for changes to USMCA and they don’t want to wait until 2026. But the USMCA is very important for the auto industry, and changes to it would affect this ecosystem and not be welcome. This will be closely watched.”
Wider effects of the tariffs would play out as higher prices for U.S. consumers for more than just cars, Canadian Prime Minister Justin Trudeau said on December 10. “Let’s not kid ourselves in any way, shape or form — 25% tariffs on everything going to the United States would be devastating for the Canadian economy,” Trudeau said, according to AP. “It would also, however, mean real hardship for Americans as well.”
In a November earnings call, Best Buy chief executive officer Corie Barry warned that the tariffs could lead to higher prices for electronics across the U.S.
Robinet’s comments came a day after S&P Global Market Intelligence released a report showing the U.S.’s trade deficit with Mexico and Canada combined has soared in the last three years, rising to $165.4 billion in 2024 from $105.4 billion in 2021. In aggregate, Mexico sent 86%, and Canada 76.9%, of their exports to the U.S. during that period, S&P Global said. A review of the 50 largest companies with bilateral trade between the U.S. and Mexico shows their exports to the U.S. were 5.4 times their imports from the U.S. in the 12 months to September 30, 2024, the firm’s data for Mexican exports and imports shows.
Mexican auto and truck assemblers and their parts suppliers exported 7.8 times the value of their imports, and accounted for two-thirds of the trade of the group of 50 firms in total. Other notable bilateral trading sectors include home appliances and tools (6.5x), consumer electronics (2.9x) and electrical machinery (2.2x).
According to insurance broker and risk advisory firm Marsh, U.S.-based organizations are bracing for significant cost shifts in their supply chains because of the proposed tariffs. Marsh recently analyzed more than 120,000 suppliers that support global clients with significant operations in the U.S. It found that 40% of their direct and indirect suppliers providing goods to the U.S. are based in Mexico, China, and Canada. This means that, on average, about one-fifth of an organization’s direct supplier base originates from these three countries, Marsh concluded.
S&P Global also said bidirectional trade raises the risk of “pancaking” of tariffs, where parts are imported to the U.S. for subsequent work and exported to Mexico or Canada to complete a final product that is then imported back to the U.S. In the case of the autos sector, that could entail a 25% import duty, which would average $6,250 per vehicle, or an additional $3,000 per vehicle excluding the impact of retaliatory duties, the firm said.
The USMCA, which went into effect July 1, 2020, was negotiated by Trump during his first term as U.S. President to replace NAFTA.
