GDP, Employment to Suffer from U.S.-Mexico-Canada Tariffs

U.S. President Donald Trump imposed 25-percent tariffs on all imports from Mexico, most imports from Canada and an additional 10-percent tariff on Chinese goods midnight Tuesday, expanding dues the administration says are in order to stop the flow of illegal substances and undocumented immigrants. Experts believe that the tariffs on the United States' most important trading partners have more potential to negatively affect all countries' GDP and employment figures as well as to drive up inflation. The jury is out on whether the move can bring certain industries and jobs back to the United States, a goal that Trump has also mentioned repeatedly.

Canada responded swiftly, also at midnight, by imposing 25-percent tariffs on $30 billion worth of U.S. goods, a measure Prime Minister Justin Trudeau said will be raised to include $125 billion of American imports in three weeks' time. In 2023, Canadian imports from the U.S. totalled $269 billion. China also responded to the new tariffs by announcing 10-15 percent dues on a range of U.S. agricultural products. China has been the biggest buyer of these following an agreement ending the trade war of the first Trump administration. The tariffs imposed in Trump's second term are now also breaking the United States-Mexico-Canada Agreement, a free trade deal Trump negotiated in 2018 as a sucessor to NAFTA. Mexico condemned the tariffs, but hasn't settled on retaliatory actions yet.

According to a calculation by Brookings Institution, the 25-percent tariffs imposed by the U.S. against Mexico and Canada alone have the potential to lower real GDP growth in the country by 0.24 percentage points. If Mexico and Canada were to retaliate in-kind with 25-percent tariffs on all U.S. goods, this could rise to 0.32 percentage points. The two countries, which ship around 80 percent of their exports to the United States, are even more vulnerable here, and are expected to lose more than one percentage point each of GDP growth because of Trump's new tariffs. If they retaliate to the full extend, this could shave off more than 3 percentage points from their GDP increases each. Decreases in employment work similarly, with the U.S. risking to lose 0.11-0.25 percent of total employment in the country, while in Canada this would be between 1.3 percent and 2.5 percent (in case of full retaliatory tariffs). For Mexico, losses would be even steeper, to the tune of 2.3 percent to 3.6 percent. While Brookings expects Trump's new tariffs to drive up inflation by 1.33 additional percentage points (lowered to 0.77 in the case of retaliation), the Federal Reserve of Boston expects a similar result, an increase of 0.5-0.8 percentage points to core inflation.

The reports also states that if the tariffs were to stay in place, U.S. exports to its two neighbors would fall by between 6 and 9 percent, while Canadian exports heading south would be decimated by 9 to 19 percent, and Mexican exports going north would fall by 14 to almost 26 percent. Industries expected to be heavily affected among the very integrated trade ecosystems between the countries are computers, electric equipment and electronics as well as some transport and manufacturing sectors. On the side of U.S. exports, mining, lumber and metal exports to both partner countries are expected to fall by 76 percent to 97 percent (if full retalaitory tariffs are enacted). Both Canada and Mexico are expected to send 40 percent to 68 percent fewer motor vehicles to the U.S., which could drive up the price of the United States' most valuable import.