Canada and Mexico are grappling with US President-elect Donald Trump's threat to place 25% tariffs on exports into their most important trade market, with both governments weighing their approaches.

Trump said he would sign executive orders putting the tariffs in place on his first day back in office. He linked the issue to what he says is Mexico and Canada's failure to prevent illegal migration and drug trafficking at US borders.

Economists say tariffs would be very damaging for both Canada and Mexico, with the latter particularly vulnerable.

"Mexico is really tied to the US economy, and any trade dispute will hurt both economies a lot, but it will hurt Mexico much deeper than the US," Jeffrey J. Schott, a senior fellow with the Peterson Institute for International Economics, told DW.

Wendy Wagner, a lawyer specializing in international trade with Ottawa, Canada-based firm Gowling WLG, said tariffs would cause serious problems for Canada.

"It seems like a very unrealistic and damaging proposition to have 25% import tariffs into your main export market," she told DW. 

Divide and conquer

The tariff threats have caused tension between Mexico and Canada.  

During a meeting with Trump at his Florida base last month, Canadian Prime Minister Justin Trudeau reportedly tried to convince Trump that Canada should not be lumped in with Mexico on drugs or border issues.

Mexican President Claudia Sheinbaum said Canada has "a very serious problem with fentanyl," adding that "Mexico should not be used as part of electoral campaigns," referring to forthcoming Canadian elections.

Sheinbaum had a phone call with Trump, after which she claimed, "There will not be a potential tariff war." She said she had made assurances to Trump regarding migration initiatives and drug trafficking.

Schott said he believes Trump's strategy is to deal separately with the countries and undermine the so-called United States-Mexico-Canada agreement (USMCA) — a free-trade deal brokered during his first term and that succeeded the former NAFTA pact.

"Trump likes to deal bilaterally," he said. "So he's not going to treat this as a North American issue."

A new deal or no deal?

Politicians in some Canadian provinces argued that Canada should strike its own deal with the US, cutting out Mexico. For his part, Trudeau said he supports the USMCA and that maintaining it is his "first choice." But he hinted at alternative options "pending decisions and choices that Mexico has made."

Bill Reinsch, a senior economics adviser with the Center for Strategic & International Studies, said he thinks tariffs on Canada and Mexico remain in the "threat category" and emphasized that the USMCA is up for renegotiation in 2026.

"It's unavoidable. They have to deal with it anyway," he told DW. "At best, Trump's going to move negotiations up a year, but it'll still be the same negotiation. It's complicated because the threat is about drugs and migrants. It's not about trade."

From threat to reality

If the tariffs moved from the threat category into reality, there's little doubt that they would present huge challenges for the Canadian and Mexican economies.

Almost 75% of Canadian exports went to the US in 2022, according to the MIT Observatory of Economic Complexity index, underlining how costly tariffs could be for Canada.

"That's a very high figure, but it's made more important by the fact that Canada is an exporting economy," said Wagner. "There's not a huge domestic market. Most Canadian companies go into business with the expectation that they will be exporting."

Canada exports a wide range of goods and commodities to the US, from petroleum to gas turbines and timber to cars. Wagner said an added factor in the relationship is how interlinked their supply chains are, particularly in the automobile industry.

Mexican dependency

Mexico is even more dependent on the USA as an export destination, with 77% of its goods going there in 2022, according to the MIT index.

The automobile sector is especially embedded and Schott emphasized that tariffs would make cars more expensive for consumers in the United States. 

"It's not going to be a boon for US production because the companies that are going to be hurt by the tariffs affecting Mexico are the companies also producing in the United States. Those costs are going to be passed on to the US consumer," he said, adding that tariffs on Mexico could make one of the issues Trump is trying to resolve — which is migration — even bigger.

"Damage to the Mexican economy only makes economic conditions in Mexico worse and encourages more illegal migration to the United States," Schott said. "I'm not sure that factor is being adequately addressed in the proposals of the incoming Trump administration."

Idle threat or serious risk?

In the event of tariffs, retaliation from both Mexico and Canada would be likely, according to Reinsch, who noted that Mexico's president already said she would put tariffs in place.

"I think the political situation in Canada would probably compel them to do the same which would be enormously disruptive to all three economies and would be enormously inflationary," said Reinsch.

There is still some optimism that Trump's style of negotiating, by making threats in advance of striking a deal, means the tariffs will not come to pass.

Wagner said she is hoping for a different solution to the problem, noting that "tariffs are really a very imperfect solution."

Yet the fact that Trump placed tariffs on steel and aluminum from both Canada and Mexico prompted Schott to take the fresh threat seriously: "He did it, and he would be willing to do it again under the right circumstances." 

Edited by: Uwe Hessler