Trump's 25% Tariffs Could Slaughter Canada, Mexico Economies, Hit US Auto Industry, Analysts Warn

A trade war across North America is about to begin. President Donald Trump‘s decision to impose a 25% tariff on all imports from Canada and Mexico starting Saturday threatens to disrupt key supply chains across the North American region, with wide-ranging repercussions among trade-intensive sectors.

The tariffs directly target two of United States’ largest trading partners. In 2023, the U.S. imported $480 billion worth of goods from Mexico, making it America’s top import source, while $429.6 billion in goods came from Canada, ranking third behind China.

Analysts and economists warn that the consequences could be severe for economies and may effect industries from automobiles and industrials to health care and consumer goods.

Uncertainty Looms As Markets Await Further Details

Joseph Brusuelas, chief economist at RSM, said that markets are failing to grasp the long-term economic risks.

“The market will not be able to have it both ways on tariffs and trade wars for long. Tariffs can’t be both a negotiating tactic and an offset that raises revenues to finance tax cuts. It’s a polite fiction that depends on the willing suspension of disbelief by the investment community that is simply not sustainable,” Brusuelas said.

Brusuelas highlighted how tariff-related concerns surged in corporate earnings discussions, with industrials and health care sectors seeing the highest mentions.

“Investors are confused by the unclear tariff rollouts from the Trump administration,” said Boris Kovacevic, global macro strategist at Convera, adding that the lack of clarity from the White House is making market pricing difficult.

Currency markets reacted immediately to the announcement. The Mexican peso has fallen by over 1% against the dollar since Thursday’s tariff announcement, while the Canadian dollar weakened 0.6%.

“The Canadian dollar and the Mexican peso will likely act as buffers to help each country deal with the ensuing negative terms-of-trade shock, as the prices of Canadian and Mexican exports are likely to fall.  Economic activity will likely decelerate in both countries and higher inflation is also likely,” said Bank of America economist Carlos Capistran.

Betting markets now indicate near-certainty that the U.S. will impose tariffs on both Mexico and Canada this year. Data from CFTC-regulated betting platform Kalshi shows odds of tariffs on Mexico surging to 96% on Jan. 31, up from 83% just a day earlier.

Mexico, Canada May Face Heavy Economic Damage, US Auto Industry Most At Risk

The economic damage of such tariff measures could be significant. In a note shared Friday, Goldman Sachs estimated that GDP in Canada and Mexico could drop by 1%-4%, with prices rising up to 2% due to the increased costs of goods.

For the U.S., the tariffs would raise the overall tariff rate by 7.3 percentage points, leading to a 0.7% increase in core personal consumption expenditures prices, the Fed’s key measure of inflation, and a 0.4% drag on GDP.

Automakers such as General Motors Co. GM and Ford Motor Co. F rely heavily on parts and vehicles imported from both countries.

“Our estimates serve as a reminder of the sizable economic and market risks associated with Trump’s trade proposals,” wrote economist Joseph Briggs.

According to Goldman Sachs, in 2024, the U.S. produced 10.19 million vehicles domestically but sold 16.03 million, meaning that 5.85 million vehicles were imported, mainly from Canada and Mexico.

With an average sales price of $45,000 per vehicle, the total value of auto imports exceeded $2.6 trillion, according to their calculation.

The 25% tariff could add billions in costs to automakers, forcing them to either raise vehicle prices or absorb the cost and cut margins. Consumers could soon feel the impact at dealerships, as higher tariffs translate to more expensive cars.

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