Effects of the Trump Administration’s Tariff Threats Against Canada and Mexico

President Trump’s repeated on again, off again tariff threats against the United States’ two largest trading partners, Canada and Mexico, along with his musings about making Canada the fifty-first state have rattled equity markets, created confusion and uncertainty, paused investment decisions, generated mistrust between erstwhile allies, and called the very viability of the North American project into question. The Trump administration’s actions on North America are triggering a rethink in both Mexico and Canada of the wisdom of having so deeply integrated their economies with the United States. This may well lead to a loosening of bonds and cooperation in the North American bloc, with negative impacts on U.S. economic and national security, to the benefit of the country’s adversaries.

The North American project, grounded in the 1988 U.S.-Canada Free Agreement, enlarged under the North American Free Trade Agreement (NAFTA) and modernized under the United States–Mexico–Canada Agreement (USMCA), sought to make North America the most prosperous and competitive region in the world. Trade among the partners has more than tripled since NAFTA entered into force. In 2024, U.S. trade with Mexico totaled an estimated $840 billion, and U.S. trade with Canada, meanwhile, totaled an estimated $762 billion. This $1.6 trillion trilateral trading bloc represents nearly 30 percent of global GDP, considerably larger than China’s share and almost twice the European Union’s share. The agreements led to deepening trade and investment governed by a set of reliable rules, integrated supply chains, and increased cultural and familial ties between the three nations, whose citizens felt they were building a future together.

However, President Trump’s approach to the United States’ neighbors threatens to unravel that history of trade, integration, and trust, as well as damage the economies of all three nations. Already, the consequences are visible in the reaction of the governments of Mexico and Canada, as well as in their citizens’ individual actions. Both countries are thinking about how to find new trading partners, and Canada is talking about building new infrastructure on its coasts to access those markets, rather than the North-South infrastructure that has been built over the previous decades. While geography, existing long-term business ties, and U.S. consumption needs will ensure continued North American trade, it is possible, however, that Mexico and Canada, in particular, may begin a decoupling process. After the imposition of a 25 percent tariff on automobiles imported into the United States, to be implemented on April 2, Canadian Prime Minister Mark Carney said on March 27 that “the old relationship [Canada] had with the United States based on deepening integration of our economies and tight security and military cooperation, is over.”

Canada
 

Energy

The first place Canada will look to diversify markets is in energy. The country is the world’s fourth-largest crude producer and relies on the United States as the market for 90 percent of its oil exports. Were it not for Canadian oil, the United States would have a trade surplus with Canada. This heavy crude is sold at a discount as there is insufficient infrastructure capacity to send it to markets other than the United States. In addition, U.S. refineries have been designed to process the heavy crude that exists in the Western Hemisphere, and they rely on Canada for 70 percent of the oil they refine. Since many are not built to refine the higher-value light crude that the United States produces from fracking, this light oil is sold on international markets.

On March 18, an open letter signed by 14 Canadian CEOs representing the four largest pipeline companies and 10 largest oil and natural gas companies was sent to the leaders of Canada’s political parties. The companies argued that there was increasing public support to build energy infrastructure, including new oil and natural gas pipelines and liquid natural gas (LNG) terminals, to expand Canada’s energy exports. What the letter didn’t say was that the intended markets: Europe, India, East Asia, and China, not the United States (though Prime Minister Carney has pledged to diversify with like-minded countries in Europe instead of China). The prime minister has often spoken about the need to build new pipelines. A recent study suggests that Canada could divert $38.4 billion per year in oil and LNG exports away from the United States and send it instead to Europe and Asia if it built new pipelines to the east and west. The government of Quebec is actively reconsidering the idea of building a pipeline from Western Canada east through the province. The strong public opposition, which shelved previous efforts, has all but evaporated due to a spike in economic nationalism. Naturally it would take time to build new pipelines; but should they come to pass, not only would the United States lose its source of cheap heavy crude, but its refineries would either have to rely on oil from Venezuela, a dictatorship which is currently under primary and secondary U.S. sanctions (and now tariffs); or they would have to retool to process U.S. light crude. Either way, there would be a significant delay and a cost to U.S. refiners and consumers with higher prices at the pump.

Critical Minerals

As the author has argued in another paper, critical minerals should have been a strategic area of cooperation between Canada and the United States, given China’s near-monopolistic control of certain minerals essential for the clean energy transition, consumer products like cell phones, and the U.S. defense industry. Now the mood has soured, and Canada is looking to other markets. In resource-rich British Columbia, the government of the province fast-tracked mining projects in February, hoping to use critical minerals as a powerful tool to buffer against the economic shocks of U.S. tariffs. As will be noted below, Canada is seeking closer ties to Europe, as the European Union approves €800 billion for urgent rearmament. Ottawa’s ambassador to Rome has written to Italian authorities that Canada has much more to offer to help the Europeans rearm, including the integration of supply chains for Canada’s large reserves of critical minerals needed for advanced defense technologies.

Interprovincial

Diversification, of a kind, will also happen within Canada. The threats to Canada’s economy have galvanized efforts to end inter-provincial trade barriers within the country, which have existed since Canada’s founding. These barriers increase costs for businesses and consumers, limiting economic growth. Provincial Premiers have agreed to work to eliminate the barriers and hope their efforts will add up to $200 billion to the Canadian economy. Prime Minister Carney has been even more optimistic, saying the economy could grow by $250 billion, which would be enough to offset U.S. tariffs; he promised to end all federal barriers to interprovincial trade by Canada’s national holiday, July 1. Some economists are not so bullish, thinking the economy might only grow by half that amount.

Defense

Canada has quickly taken steps to begin reducing its reliance on the United States for equipment amid suggestions that Canada be cut from the Five Eyes intelligence alliance. Prime Minister Carney has ordered the Minister of Defense to review the agreement to purchase 88 F-35 stealth fighters and look at alternatives. There has been a groundswell of support among Canadians to cancel the $19 billion purchase, itself made after a torturous and controversial process, and find aircraft other than those manufactured and maintained in the United States. In addition, Canada appears to be in advanced talks to join the Europeans in their defense industrial expansion triggered by President Trump’s ambivalence over NATO and his approach to ending the war in Ukraine. During his first overseas trip as prime minister, Carney visited France and the United Kingdom, where he discussed security cooperation with the French and British leaders. He also discussed Canadian participation in the efforts to rearm Europe with European Commission President Ursula von der Leyen in order to strengthen Canadian security networks beyond the United States and to boost Canada’s defense industrial base. Under a Canada-European alliance, Canada could be a place where European allies train their forces, safely manufacture European fighter jets, military arms and munitions, and other critical technologies at its own industrial facilities.

Mexico

Perhaps because Mexico has a history of being pressured by the United States and has learned from those experiences, Mexican President Claudia Sheinbaum, while publicly defiant, has kept her cool and her cards closer to her chest, unlike her Canadian counterparts. She has told her compatriots that “we must avoid confrontations . . . At the same time, we must behave as equals, never subordinates. We must defend our sovereignty, our independence, and defend the Mexican people.” President Sheinbaum said Mexico would apply tariff and nontariff retaliatory countermeasures, without ever detailing what those would be. She has earned plaudits by not only confronting President Trump, but also by gaining the U.S. president’s public respect.

Migration and Drug Trafficking

President Sheinbaum’s strategy appears to be publicly tough but quietly deliver on the nontrade irritants the Trump administration wants Mexico to solve. Mexican officials were already deterring migration to the United States, and President Sheinbaum agreed to post an additional 10,000 Mexican National Guard troops on the border to help stem the human flow and the trafficking of fentanyl across the border. In December, the Mexican military made the largest seizure of fentanyl in the country’s history, and two months later, President Sheinbaum extradited 30 jailed convicts or individuals accused of ties to violent drug cartels and of trafficking cocaine, heroin, and fentanyl into the United States. Some commentators, however, are beginning to criticize her approach as caving in to President Trump’s demands.

Diversification Through Trade Agreements

While she has extolled the benefits of USMCA giving strength to North America and allowing it to compete successfully with other regions of the world, Sheinbaum has also warned that if the threatened tariffs are maintained, Mexico would have to diversify its economy and would also look to attract foreign investment. In fact, Mexico is already taking small steps to diversify its trade. In 2024, it increased its exports to several Asian countries and Hong Kong, with double-digit percentage increases in its exports to destinations such as the Philippines, Malaysia, Singapore, Thailand, and Taiwan, despite still sending the vast majority of its trade to the United States. The president of the National Association of Importers and Exporters of Mexico, Gerardo Tajonar, explained in early March that Mexico needs to adapt its export offering to Asia. He added that it was important for Mexico to strengthen its relationship with China, its third-largest trading partner, to facilitate access for Mexican products, over the current strategy of attracting Chinese investments. Because of USMCA and its adjacency to the United States, Mexico has not taken full advantage of the 12 free trade agreements it has signed with 46 countries, and other commercial agreements it has entered into, and could look for new opportunities under those arrangements.

In January, Mexico and the European Union concluded negotiations to modernize the EU-Mexico global partnership, seeking to deepen and broaden their political dialogue, cooperation, and trade. The deal updates an agreement from 2000, eliminating restrictions in key sectors such as agri-food, services, and public procurement, in addition to incorporating regulations on digital trade and data protection.

Anti-Americanism

Anti-Americanism has been an aspect of both the Canadian and Mexican psyche until about 30 years ago. Scholars on Canada and Mexico have both recently argued that this anti-Americanism had been forced into remission for a generation by NAFTA, but now it is resurgent.

Canadians are voting against tariffs and annexation with their wallets, by boycotting U.S. products, liquor, and vacations to the United States. The U.S. Travel Association says Canada is the top source of international visitors to the United States, with 20.4 million visits in 2024, generating $20.5 billion in spending and supporting 140,000 U.S. jobs. A 10 percent reduction in Canadian travel could mean 2 million fewer visits, $2.1 billion in lost spending, and 14,000 job losses. Canadian air travel to the United States is down 13 percent in February, and travel by car has also seen a sharp decline, with 23 percent fewer Canadians crossing the border. Forward booking data shows that airline ticket bookings are down by over 70 percent in every month through to the end of September 2025.

For their part, Mexicans are reacting in similar ways to Canada. In February, federal authorities, business leaders, creators, innovators, artists, athletes, and prominent members of society gathered in a ceremony at the Ministry of Economy to promote the consumption of “Made in Mexico” products and foster innovation in the national economy. There are calls for boycotts of U.S. companies and products, and to substitute American stores and brands with Mexican ones.

Separate Trade Agreements?

By violating the letter and spirit of USMCA, shaking the foundations of trust that the agreement cemented, and moved by citizens angry with U.S. policies, leaders in both Mexico and Canada will have a difficult time balancing the nationalist currents circulating in their countries with the demands of the Trump administration in future negotiations. It is also possible they will have to do so separately. Prime Minister Carney and President Trump’s March 29 telephone conversation, which the latter described as “extremely productive,” provides some hints. In President Trump’s words, he agreed to meet with whoever wins Canada’s election to “work on elements of Politics, Business, and all other factors, that will end up being great for both the United States of America and Canada.” Prime Minister Carney said later in the day that the scale of Mr. Trump’s efforts to reset American trade relations requires a new deal between Canada and the United States.

This raises the question as to President Trump’s strategy with his two neighbors. Is he interested in renegotiating USMCA as a trilateral pact? Or is his preference to deal with Canada and Mexico separately, through two bilateral deals, which would also address irritants not related to trade, like defense arrangements with Canada, including in the Arctic, and migration and drug trafficking from Mexico. He was, after all, prepared in 2018 to sign a deal with Mexico without Canada. And he has shown that he does not like the possibility of trading partners working together to blunt his administration’s policies, for instance, threatening to place tariffs “far larger than currently planned” on Canada and the European Union if they coordinate their retaliatory measures. Two bilateral deals would be a nightmare for the highly integrated North American auto sector, as well as other deeply intertwined trilateral supply chains.

Whatever trade agreement(s) emerge once the three countries begin the renegotiation of their commercial relations, one thing is clear: Both Canada and Mexico will want to preserve as much as possible of their relationship with the United States, while simultaneously looking for other partners to lessen their dependence on the United States. Canada and Mexico will make long-term investments in infrastructure to facilitate access to non-U.S. markets. Instead of working together to build “Fortress North America,” the three countries could become less integrated, making them less than the sum of their parts in a much more fraught geopolitical world.

Christopher Hernandez-Roy is the deputy director and senior fellow of the Americas Program at the Center for Strategic and International Studies in Washington, D.C.