Sure Friends Betrayed

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For two months now, Donald Trump has been repeatedly threatening a massive trade war against both of America’s neighbors. In early February he signed an executive order placing 25% tariffs on all goods from Mexico and Canada, but backed down before the implementation date and agreed to a one-month pause after receiving token concessions. In early March he let those tariffs come into force for a few days, only to partially backtrack by announcing the tariffs would exclude all goods imported under the USMCA trade deal’s rules of origin until early April. In the meantime, he implemented 25% tariffs on all steel and aluminum entering the United States, products where Mexico and Canada are both key sources of imports, and he continually promises universal tariffs will actually go into effect starting next week alongside a suite of tariffs on most of America’s largest trading partners. Plus, he’s continually expanding the trade war using additional actions against major Canadian and Mexican exports like the automobile tariffs signed yesterday and upcoming tariffs on lumber, agricultural products, and more.

These tariffs’ economic costs will be disproportionately borne by American workers, companies, and businesses, but the US is an extremely large diversified economy with room to absorb shocks that would thoroughly devastate most other countries. By contrast, Canada and Mexico are much smaller by both population & GDP—even though the cost of the trade war is mostly absorbed by Americans, the share that falls on Canada and Mexico is larger relative to their economies. US trade with Canada and Mexico is 7% the size of its GDP, meanwhile Mexico and Canada’s trade with the US is 45% and 34% the size of their GDP, respectively, making them by far the most exposed countries to the effects of a US-led trade war. The Peterson Institute for International Economics thus estimates that the trade war would reduce Mexican and Canadian GDP by 4-5x as much as US GDP and would increase inflation by 3-4x as much. Officials at all levels of the Mexican and Canadian governments are drawing up plans to brace for a possible trade-war-driven recession.

The cruel irony is that both countries have spent the last decade-plus trying to make themselves the centerpiece of US “friend-shoring” efforts to move