Trump's Tariff Threats Alone Likely to Chill North American Investment

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NYSE workers during morning trading Nov. 26 in New York.

Incoming U.S. President Donald Trump is unlikely to place large tariffs on Canada and Mexico immediately upon taking office, but even the mere threat to do so will likely chill investment in North America amid growing uncertainty about U.S. trade policy. In a Nov. 25 post on Truth Social, Trump said that he will sign an executive order Jan. 20, 2025 — his first day in office as U.S. president — to place a 25% tariff on all imports from Canada and Mexico over immigration and drug flows to the United States, and that tariff "will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!" Trump's post immediately reverberated across markets, with the Mexican peso falling 2% against the U.S. dollar and the U.S. dollar hitting a four-and-half-year high against the Canadian dollar. Canadian Prime Minister Justin Trudeau reportedly called Trump less than two hours after the threat. Mexican President Claudia Sheinbaum warned at her Nov. 26 press conference that the tariffs were "not acceptable" and hinted that Mexico would retaliate with tariffs on the United States.

In a separate post on Truth Social, Trump also threatened to immediately place an additional 10% tariff above any others on China due to fentanyl being sent to the United States despite previous promises by Chinese officials to crack down, including by instituting the death penalty for drug dealers.
In his post, Trump cited a new caravan of at least 1,500 Central American migrants moving across Mexico, trying to reach the U.S. border before he takes office. Despite Trump's rhetoric, migrant flows at the U.S.-Mexico southern border have been at lower levels in recent months than in 2023. In October, U.S. Customs and Border Patrol officials reported about 106,000 encounters at the southern border, compared to approximately 241,000 in October 2023 and 232,000 in October 2022.
Trump did not specify the trade authority he would cite to place the tariffs on Mexico and Canada, though he would likely use the International Emergency Economic Powers Act of 1977. Doing so would be controversial and result in immediate legal challenges to his authority to implement the tariffs, though he would likely win those legal fights given the act's broad language.

Given the economic interdependence among the three North American countries and previous threats Trump has made on social media that have not materialized, Trump is unlikely immediately to implement tariffs on Canada and Mexico. Of the two, Mexico faces a much higher risk of tariffs actually being implemented, though they would likely be short-lived. During Trump's first term, he tweeted similar threats to place tariffs on imports without going through a formal process to place tariffs on a country and never actually followed through with their implementation. This suggests that this threat will likely follow a similar pattern so long as both Mexico City and Ottawa try to work closely with the incoming president to demonstrate deliverables on border and drug flows to create the appearance of a victory for Trump, who has frequently used tariff threats as a negotiating tactic. Trump's threat will also lead to intense pressure by corporate America, as well as many Republicans on Capitol Hill and in state capitals, to refrain from implementing the tariffs, including strongly Republican border states like Texas that are highly dependent on trade with Mexico. Not only would large tariffs on Mexico and Canada cause U.S. manufacturers dependent on intermediate Canadian and Mexican goods to experience a significant supply chain shock and price increase, but U.S. exports to Canada and Mexico would likely see significant retaliatory tariffs — perhaps reaching the same 25% level — disrupting U.S. exports to the country's largest two export destinations. This makes some solution likely before Trump takes office, especially for Canada, since migrant flows through the U.S. northern border are far below those at the southern border. But if one is not found, Trump's promise to sign an executive order targeting those countries will likely result in some sort of a delay due to negotiations or an executive order authorizing a period, perhaps weeks or months, that leaves more time for negotiations before tariffs enter effect. Nevertheless, the likelihood of tariffs being implemented is nonzero, especially in the case of Mexico, as it is unclear exactly what Trump is demanding from its neighbors. Moreover, while they can change some border, drug and migrant policies, they do not have the ability to completely halt migrant flows through their countries and achieve total victory in the war on drugs. If tariffs are implemented, large carveouts for certain goods including energy products are likely to limit economic damage to the United States.

In a June 22, 2018, tweet, Trump explicitly said that the United States "will be placing" a 20% tariff on EU cars due to EU trade barriers unless they are lifted. Ultimately, no barriers were lifted and Trump never placed tariffs on EU vehicles in his first term.
In a May 30, 2019 tweet, Trump said that the United States would place a 5% tariff on Mexico — a far more realistic threat than that of a 25% tariff — entering effect June 10, 2019, that would be gradually increased until migration through Mexico stopped. Ultimately, no tariffs were implemented after Mexico and the United States reached an agreement in which Mexico deployed its national guard to its southern border with Central America, though migrant flows never stopped.
Although the United States has a trade deficit with both Canada and Mexico, its two neighbors are its two largest export destinations. In 2023, the United States exported $323 billion worth of goods to Mexico and imported $475 billion worth of goods. In 2023 the United States exported $354 billion worth of goods to Canada and imported $419 billion worth of goods.

If tariffs are actually implemented, they could cause Canadian and Mexican economies to quickly enter a recession and trigger a spike in the prices of imported goods from Mexico, particularly seasonal goods. But even if they are not implemented they will dampen investment across North America as they drive up uncertainty regarding future North American trade relations and more tariff threats down the road. The Mexican and Canadian economies are highly dependent on exports to the United States, making the direct impact of a 25% tariff on their economies significant. Estimates of the impacts of U.S. tariffs vary depending on the size and scope, but several economics research companies have estimated that Trump's threat to place 10% tariffs on all U.S. imports would hurt Mexico's gross domestic product by about 1% to 2% and Trump's 25% threat is much higher. The impact of tariffs on Canada's economy range from 0.5% to 5% of GDP, depending on the level of impact. The relatively lower U.S. dependence on exports and imports would somewhat blunt the macroeconomic impact on it of a 25% tariff. It would, however, harm U.S. manufacturers dependent on Mexican and Canadian intermediate goods — especially the automotive industry — and also cause a spike in inflation for goods imported from Mexico and Canada, particularly seasonal produce like avocados, as Mexico is the largest exporter of horticulture products to the United States and Canada is third. These impacts would be felt the most in border states more dependent on trade with Mexico and Canada. Even if Trump fails to carry out his threat, the threat alone will make future explicit threats on Canada and Mexico more likely and will also intensify concern around the future of the United States-Mexico-Canada Agreement, which comes up for review July 1, 2026. This uncertainty will hurt business confidence for investors in all three countries as they try to invest in new projects — and, in many cases — North American supply chains designed to reduce reliance on imports from China, which faces a higher likelihood of larger tariffs

In 2023, 79.6% of Mexico's exports went to the United States. In 2023, Mexico's export-to-GDP ratio was 36.2%, its lowest level since 2015.
In 2023, 77.5% of Canada's exports went to the United States. The same year, Canada's export-to-GDP ratio was 33.5%.
In 2023, 33.5% of the United States exports went to Canada or Mexico. The same year, the U.S. export-to-GDP ratio was 11%. Its import-to-GDP ratio was 13.9%.
Trump's tariff and trade policy in 2018, for example, was estimated to have reduced aggregate investment in the United States by $23 billion to $47 billion, according to a study published in the Journal of Monetary Economics.