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 imposed a 25% tariff on the approximately $1 trillion imports sent to the US each year by Mexico and Canada as part of its North American trade agreement. These tariffs are expected to significantly raise the costs of Canada and Mexico's exports, weaken the economy, and plunge into a recession.
Trump's decision to rewind decades of economic integration raises major questions about the future of North America and the future of an industry built around the ideas of an economically integrated continent. Some factories in Canada and Mexico may move to the US to avoid tariffs, but taxation will increase 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 suggested on Wednesday that the deal could be a long-lived one. He was exempted only for a month to prepare tariffs for automakers that remained on the terms of the US-Mexico-Canada agreement or the USMCA. Trump officials said they hope to issue more tariffs next month when the president announces what he calls “mutual” tariff measures to Canada and Mexico.
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 Sloino, director of Canadian Economics at Oxford Economics, estimated that tariffs will cause the Canadian economy to fall into a recession this year, bringing consumer price inflation rates to nearly 4% year-on-year and layoffs to 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 could reduce Mexico's economic growth rate by about 2 percentage points, leading to massive factory closures and unemployment.
The tariff threat has already persuaded some companies to look beyond Mexico.
Randy Carr, CEO of World Heraldry, has produced labels and emblems that include US military uniforms, FedEx drivers and National Football League players, and said the tariffs have pushed for the establishment of secondary factories in the Dominican Republic in addition to the Mexican factory.
Kerr said he would consider bringing manufacturing to the US if tariffs were maintained, but would take time and would consider significantly increasing the costs of his products. However, the threat has led him to rethink plans for the next three years, pulling back all spending on expansion and employment.
“We're sitting on a lot of projects that we can't otherwise, as a result of the tariff threat alone,” he said.
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 hurt US growth and cause more severe pain among communities that rely on those markets. Canada and Mexico are the largest export markets for many American farmers.
US industries relying on raw materials in neighboring countries will also see costs rise, and some companies may close as tariffs erase profit margins. Analysts at S&P Global Ratings said Thursday that they expected tariffs to reduce US gross domestic product by 0.6% over the next 12 months, while expecting Canada and Mexico's GDP to fall by 2-3% from previous forecasts.
The tariffs also effectively crushed 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. Supporters of the agreement say Trump's willingness to ignore it will close the company's investments. And turn some of the substantial investments they have made under the agreement before into losses.
On Wednesday, the major American automaker issued a statement thanking the tariff for a one-month suspension. But in a conference call Tuesday, they told Trump that placing tariffs on cars and parts in Canada and Mexico would effectively erase all the profits of businesses by imposing billions of dollars in new expenses.
Tariffs have destroyed 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 assume was “a complete collapse of the Canadian economy” 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 American workers, 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 manufacturing employment increases overall in the US, certain factories could be closed due to relying on supply chains running through Canada and Mexico.
“There will be a great disruption in the local economy,” he said. “I'm worried about the disruptive effects of this and the negative effects of longevity.”
Jack Ewing contributed the report.
