The news: President-elect Donald Trump promised to impose tariffs of 25% on all imports from Mexico and Canada on his first day in office in January.

• He also plans to raise tariffs on Chinese imports by 10%, although it’s unclear whether they would go into effect at the same time.
• The tariffs are meant to force Mexico and Canada to do more to prevent illegal immigration into the US and push all three countries to step up their efforts to curb the flow of illicit drugs into the country.

The plan was met with immediate pushback from Mexico’s president, Claudia Sheinbaum, who promised to impose retaliatory tariffs should Trump follow through.

Likewise, the premiers of Quebec and Ontario warned that the move poses a serious threat to Canada’s economy, while a spokesperson for China’s embassy in Washington, Liu Pengyu, wrote on X that “no one will win a trade war or a tariff war.”

The impact: The tariffs threaten to upend US relations with three of its most important trading partners and would lead to more pain for consumers in the form of higher prices and reduced buying power.

• Mexico surpassed China last year to become the US’ top source of foreign goods, accounting for 15.43% of imports to the latter’s 13.86% share, per the Census Bureau.
• Canada wasn’t far behind, at 13.59%, with energy, cars and trucks, and consumer goods comprising the bulk of imports.

Besides the geopolitical fallout, the new tariffs will likely reignite inflation as companies look to pass on the higher costs of imports to consumers through price hikes. The pain will be particularly acute in the grocery, energy, and auto categories, where the US is particularly reliant on imports from Mexico and Canada.

• More than half of US fresh fruit imports in 2022 came from Mexico; the US is expected to import $49.9 billion worth of agricultural goods from Mexico alone in FY 2025, per the USDA.
• Canada is “essential” to the US’ energy supply, its government said in a statement; it’s the US’ largest source of crude oil. Tariffs would lead to a spike in energy prices for US consumers and increased costs for petroleum-based products.
• Both Mexico and Canada play large roles in the manufacture of autos and car parts; tariffs could cause new car prices to rise between $1,000 and $5,000, while the cost of replacement parts would also increase significantly, per Newsweek.

Our take: Trump’s tariffs would be a heavy burden for companies and consumers—which is why some analysts see them as a bargaining tool to extract concessions from trade partners rather than a guaranteed course of action.

• Tariffs “would spell disaster for the US auto industry,” Bernstein analysts told investors, hence the expectation that they are “unlikely to happen in practice.”
• At the same time, tariffs were a central component of Trump’s reelection campaign—despite warnings from economists that the plan would effectively be a tax on consumers and stoke inflation—making it likely that he will follow through on his promises.

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