Introduction
President-elect Trump posted a message today on his social media platform Truth Social that on his first day in office he would impose a 25% tariff on all products coming into the United States from Mexico and Canada. His message stated that the tariffs would remain in effect until Canada and Mexico take actions to stop drugs such as Fentanyl and illegal aliens from entering the U.S.

The message is clearly intended to be provocative, and to send a message to Canada and Mexico that he intends to take a hard line on imports of illegal drugs and of illegal aliens into the U.S. It’s likely to be seen as an aggressive opening bargaining position, but strains credibility given the significant economic disruption such a move would create, not only for the economies of Canada and Mexico but also for the U.S.

While Trump has talked openly about imposing across the board tariffs of 10-15% against imports from all sources, this is the most explicit link he has made between tariffs and imports of illegal drugs and the movement of illegal aliens into the U.S. It’s also the first time he has targeted Canada in the same way as Mexico, which is a far greater source of both illegal drugs and illegal aliens entering the U.S. It’s also the first time he has threatened far more extreme measures against Canada and Mexico than other trading partners, with the exception of earlier threats to impose tariffs of 60% or higher against China.

Trade Obligations
Imposing such a tariff would be a blatant breach of the CUSMA, both for the increase of tariffs and the higher tariffs that Canada and Mexico would be paying compared to other countries. It would also be a breach of U.S. WTO obligations and would leave Canada and Mexico facing higher tariffs into the U.S. market than virtually any other country other than Russia and North Korea. The post also contained a statement that Trump would ley an additional 10% tariff on imports from China into the U.S., which would leave Canada and Mexico facing significantly higher tariffs into the U.S. than China. Trump had earlier promised that he would be imposing tariffs of at least 60% against all U.S. imports from China.

Trade Implications
Canada and Mexico are the top two trading partners of the U.S., followed by China. In 2023, close to $3.6 billion of goods and services crossed the border between Canada and the U.S. every day. Canada’s market is closely integrated with the U.S. market, and supply chains are closely intertwined. Total trade between Canada and the U.S. in 2022 was U.S.$908 billion, with Canada exporting $438 billion to the U.S. and the U.S. exporting $308 billion to Canada. A significant proportion (27%) of Canada’s merchandise exports to the U.S. are energy-related, which the U.S. relies on. Canada is the principal source of U.S. imported energy, including oil, natural gas, electricity, and uranium. Agri-food is also an important export, with over $40 billion exported to the U.S. from Canada in 2023.
Imposing 25% tariffs on products like energy and food that the U.S. needs, as well as causing chaos in integrated supply chains and markets would not only have a devastating effect on Canada, with 78% of our exports going to the U.S., but would also be a significant shock to the U.S. economy. Such an extreme message to the most important trading partners of the U.S. is likely to not only spark fears of a trade war in the North American economy, but given the scale also sends a highly negative signal to the world economy.

Next Steps
Canada and Mexico are likely to react cautiously to Trump’s post and await expected widespread criticism and negative market reactions to mount pressure against such a move by the U.S. With Trump not taking office until January 20th, there remains significant time to attempt to dissuade the U.S. from such a drastic action.