Mexico and Canada: Diverging Strategies to Tackle Trump’s Tariffs
David Yang | 31 March 2025
Summary
In response to United States (US) President Donald Trump’s tariffs, Canada has retaliated while Mexico has placated, yet both responses have essentially resulted in the same imposed tariffs.
Trade policy uncertainty will continue to plague business supply chains across the region, with Canadian and Mexican exporters suffering losses. The US car industry will be hobbled by automotive tariffs due to its reliance on production lines that cross borders multiple times.
Reciprocal tariffs on 2 April will very likely hit Canada harder than Mexico. Pressure will likely grow on Mexico to distance itself from Chinese exporters, towards negotiating a regional common external tariff.
Trump has hit Canada and Mexico with damaging tariffs, disrupting trade relations within the United States-Mexico-Canada-Agreement (USMCA) area. Targeted 25% tariffs on Canadian and Mexican imports were first imposed on 1 February 2025, before being paused for 30 days after securing assistance with US drug and immigration enforcement efforts. The tariffs came back into force on 4 March, but temporary exemptions were made for goods covered by the USMCA for another 30 days. Trump has also imposed a 25% tariff on global steel, aluminium, and automotive imports into the US, hurting Canada and Mexico as major suppliers of metals, cars, and automobile parts.
Canada’s response has been a strategy of targeted retaliation. Ottawa has responded with tariffs on CAD 59.85 (USD 41.5b) worth of goods, with another CAD 125b (USD 86.7b) pending if US tariffs remain imposed. Canada seeks to maximise impact on products from Republican states: Florida orange juice, Kentucky spirits, Wisconsin motorcycles. Canada’s supply dominance upstream of the US auto industry in metals and energy provides more bargaining power over Trump, who has made reviving US carmakers a priority. This is evidenced by Trump’s lower tariffs on Canadian energy imports and Ontario’s threat to increase electricity prices for importing US states. Furthermore, Canada’s closer ties with the EU allow for potential coordinated retaliation, a threat Trump has tried to deter with more tariff threats. With a snap election scheduled on 28 April, Canada’s tactics and rhetoric will likely escalate amid growing Canadian nationalism centred around anti-US sentiments.
Mexico’s lack of retaliation stems from a weaker bargaining position: higher reliance on US trade and concentration in manufacturing and automotive sectors, which Trump seeks to bring back to the US. Trump pressured Mexico to deploy 10,000 National Guardsmen to assist US drug and immigration enforcement. Mexico’s status as a backdoor to America for Chinese auto producers will likely be Trump’s next target. While the US and Canada have raised tariffs on Chinese cars, Mexico’s lack of tariffs and access to the USMCA has made it a destination to finish producing Chinese cars for exports. In 2023, Mexico overtook China as the US’s biggest export partner, while 2023 Chinese foreign direct investment (FDI) into Mexico was over double that in 2021 and 2022.
However, both strategies have so far yielded little difference in the tariffs applied. The Trump administration likely shapes tariff policy on each country’s underlying trade deficits and role in the US auto industry. The March tariff pause on goods covered by the USMCA resulted not from Canadian or Mexican concessions but to relieve the American automotive industry. This relief was short-lived, however, as Trump imposed universal 25% tariffs on the non-US-made content of vehicle imports and automobile parts. Mexican cars exported to the US are 38% US parts by value, while Canadian and US supply chains are so intertwined that the Department of Transportation does not differentiate between American or Canadian-made parts in vehicles. The complications caused by these inextricable supply chains forced the administration to exempt auto parts covered by the USMCA until they can differentiate the contents’ production locations.
While Trump has the express goal of reducing the US trade deficit and onshoring manufacturing via tariffs, it will take years of capital investment for the US to build up a completely domestic automotive supply chain, and cripple US carmakers in the process. A possible compromise might be a repeat of Trump’s first term, when tariffs were used as leverage to renegotiate the North American Free Trade Agreement. To keep non-USMCA content out of the trade bloc, a common external tariff on automobiles and manufactured goods akin to Europe’s Customs Union might be agreed upon, while higher minimum wage requirements on automotive workers could target Mexico’s cheap labour.
Forecast
Short-term (Now - 3 months)
Trump’s reciprocal tariffs inbound for 2 April are almost certain to target Canada’s protected dairy and lumber industries. Mexico’s lack of one-sided duties may spare it from major reciprocal tariffs, though any universally imposed levies will hurt Mexico as the US’s biggest importer.
Medium-term (3-12 months)
The tariff exemption for USMCA-covered auto part imports is highly likely to remain through the first half of 2025, and any full application of tariffs will be imperfectly enforced. Pressure on Mexico to reduce its trade deficit with and receipt of FDI from China will likely grow.
Long-term (>1 year)
2026 USMCA renegotiations will likely converge on reaching common regional external tariffs on automotive and manufactured imports, and higher minimum wage requirements for automotive workers.
