The Changing Landscape of U.S., Canada, and Mexico Trade

Written by Amy Shen (Research Lead), Lam Nguyen, Christian Naida, Stephanie Bui, & Sophie Aguas

KEY POINTS:

• President Trump’s 25% tariffs on steel and aluminum will adversely impact US consumers and manufacturers through rising prices on imported goods 

• International trade relations between the US and importing countries are in conflict due to unfavorable tariff terms 

• Automotive, construction, and manufacturing sectors will take the biggest hits from tariffs 

  
  

Introduction 

Over the last few months, the implementation of U.S. tariffs on Canada and Mexico has reignited trade tensions across North America. Under President Trump’s renewed “America First” agenda, the U.S. has implemented tariffs on many important items. Canada and Mexico, both key trading partners under the USMCA, have responded with retaliatory measures, leading to increased costs, disrupted supply chains, and economic uncertainty. The tariffs have already affected trade volumes, forcing businesses to adjust operations while consumers face rising prices. 

Industries most reliant on North American trade have been hit hardest. The automotive sector faces an estimated $400 increase per vehicle due to higher material costs, while agricultural producers struggle with retaliatory tariffs on pork, dairy, and soybeans. Electronics and energy industries, which depend on raw materials from Canada and Mexico, have also reported rising production expenses. Though warehousing and logistics initially benefited from stockpiling efforts, the overall economic outlook remains negative for businesses that depend on integrated supply chains. 

Beyond direct costs, the tariffs have thrown North American supply chains into chaos. Many industries rely on seamless cross-border movement, with some automotive parts crossing multiple times before final assembly. Increased border inspections and compliance requirements have led to shipment delays and higher transportation costs. Companies are now rethinking sourcing strategies, with some delaying expansions or shifting operations to other markets. 

In response to the tariffs, Canada and Mexico have taken different approaches to retaliation. Canada quickly imposed $29.8 billion in counter-tariffs on American steel, aluminum, and consumer goods while banning certain U.S. alcohol imports. Mexico has been more measured, avoiding immediate escalation but keeping its options open for future retaliatory actions. These strategies reflect the countries' distinct economic priorities and political considerations. As businesses and policymakers navigate these trade disputes, the long-term consequences remain uncertain. 

Current Situation 

In recent months, President Trump’s trade policy, centered around his “America First” agenda, has intensified trade tensions with key partners such as Canada and Mexico. The administration’s decision to impose 25% tariffs on steel and aluminum, along with 10% tariffs on energy and fertilizer, has led to higher costs for businesses and consumers (The White House, 2025). In response, both Canada and Mexico, major trading partners of the U.S., have introduced targeted countermeasures. 

Mexico, safeguarded by the United States-Mexico-Canada Agreement (USMCA), has largely avoided direct exposure to the new tariffs. As stated by President Claudia Sheinbaum (AP News, 2025), the free-trade agreement signed during Trump’s first administration has prevented Mexico from being impacted by these tariffs. Although Mexico has dodged these tariffs, many are worried about the uncertainty of the future in terms of trade relations. In the meantime, Mexico plans on focusing on the existing 25% U.S. tariffs on imported steel and aluminum (AP News, 2025). 

Canada, by contrast, responded with a comprehensive $29.8 billion in tariffs on U.S. goods, as outlined by the Canadian government (Government of Canada, 2025): 

• $12.6 billion on steel products: After the U.S. imposed a 25% tariff on Canadian steel, Canada countered by placing tariffs on U.S. steel imports. This had a significant impact on U.S. steel producers, many of whom relied heavily on the Canadian market. 

•  $3 billion on aluminum products: The U.S. also put a 10% tariff on aluminum from Canada, so Canada retaliated with tariffs on U.S. aluminum exports, sending a strong message. 

•  $14.2 billion on everyday goods: In addition to steel and aluminum, Canada targeted a variety of everyday products from the U.S., such as orange juice, peanut butter, alcohol, and appliances. This move affected a wide range of industries that were reliant on exports to Canada. 

These tariffs immediately affected cross-border trade volumes, with many industries reporting slower shipments and reduced exports. Because it became more expensive to import and export goods due to the new tariffs, businesses traded less. This affected industries that rely on smooth trade between the U.S., Canada, and Mexico, and disrupted the usual flow of goods across North American borders. 

Source: U.S. Census Bureau via FRED 

Mexico’s exports to the U.S. consistently stayed higher than Canada’s, showing just how much Mexico depends on U.S. trade—about 80% of its exports go to the U.S. There was a noticeable spike in Mexican imports throughout 2024, a result of companies stockpiling goods ahead of the expected tariffs. Then, in December 2024, imports from both countries suddenly dropped, likely as a reaction to Trump’s tariff threats even before they were officially in place. Canadian imports rebounded in January 2025, likely because companies were either trying to stay ahead of the new tariffs or were quick to adapt to the changing rules. Overall, this graph highlights how the threat of tariffs can quickly influence trade behavior and cause noticeable shifts in import patterns. 

Impact on Key Industries and Businesses 

The 2025 tariffs on Canadian and Mexican imports have disrupted several major U.S. industries by increasing input costs, straining supply chain logistics, and triggering targeted retaliatory measures. While some sectors have managed short-term adjustments, others are facing structural challenges that could persist well beyond the tariff timeline. 

The U.S. automotive industry is grappling with significant disruptions following the imposition of a 25% tariff on imported vehicles and auto parts from Canada and Mexico. This policy has led to a complex array of challenges affecting production costs, supply chain logistics, and strategic planning. Major manufacturers such as General Motors (GM) and Nissan have responded by shifting more production to U.S. plants to mitigate tariff impacts. GM, for instance, is increasing production of its Chevrolet Silverado and GMC Sierra at its Fort Wayne, Indiana plant, adding approximately 225 to 250 jobs. Similarly, Nissan is maintaining two shifts at its Smyrna, Tennessee plant to boost domestic production and avoid tariffs on imports from Japan and Mexico (New York Post). Conversely, companies like Stellantis have faced immediate setbacks. The automaker announced the furlough of 900 U.S. workers and temporary production halts in Canada and Mexico, citing the need to assess the impact of the tariffs (Financial Times). This move underscores the broader industry concern that tariffs could increase production costs by up to $5,000 per vehicle, potentially reducing earnings for major automakers by as much as 60% . The tariffs have also introduced a climate of uncertainty, leading to what economists' term "planning gridlock." Manufacturers are hesitant to make long-term decisions regarding sourcing and production site allocations due to the unpredictable nature of trade policies. This hesitation is likely to have cascading effects on smaller suppliers and employment across auto-producing regions. 

U.S. agriculture has been directly targeted in retaliatory tariffs. While earlier measures focused on duties for commodities like pork, whiskey, dairy products, and soybeans, recent developments reveal a broader strategy. In March 2025, Canada suspended imports from Smithfield Foods’ Tar Heel, North Carolina pork processing plant—the largest in the U.S.—officially citing regulatory noncompliance (CNBC). However, the move is widely seen as a calculated escalation amid ongoing trade tensions. Mexico followed by announcing its own set of tariffs shortly, thereafter, signaling a coordinated response to protect domestic producers and apply pressure on politically sensitive U.S. constituencies. The impact on farmers is twofold. First, they face a direct loss of export markets for key commodities. Second, the retaliatory tariffs come at a time of already tight margins, meaning any sustained drop in demand from Canada and Mexico could be financially devastating. Given that over 80% of Mexico’s exports go to the U.S., and the U.S. agricultural sector is heavily export-driven, the mutual dependency heightens the risk of long-term damage to cross-border agri-trade (The White House). 

Sectors reliant on metals and high-tech components have also been caught in the tariff crossfire. The 25% tariffs apply to a range of intermediate goods including steel, aluminum, computer parts, and energy inputs, which are essential for downstream industries such as consumer electronics and clean energy. For example, Acer has already announced a 10% price increase across its entire product line, citing increased input costs due to tariffs. Energy producers are also facing significant challenges. The American Petroleum Institute, as reported by Reuters, has warned that tariffs on crude oil from Canada and Mexico could disrupt fuel pricing and regional energy cooperation. Although energy was partially exempted (with Canadian energy imports taxed at 10% instead of 25%), the policy has still introduced volatility into an otherwise highly integrated North American energy market. 

One of the few sectors to benefit in the short term was warehousing and logistics. Leading up to the tariff implementation, businesses began stockpiling inventory to hedge against future cost increases. This surge in demand created a temporary boom in freight, storage, and inventory services. However, this benefit is likely to be short-lived. As the cost of replenishing inventory rises under the new tariffs, and as trade volumes adjust, the logistics sector may soon face a correction. 

Route Disruptions and Supply Chain Strain 

The tariffs implemented in 2025 between the United States, Mexico, and Canada have caused significant disruptions to North American supply chains. Industries that rely heavily on cross-border production are facing mounting logistical challenges and rising costs. These disruptions stem from the deep integration of North American manufacturing, where production processes often span multiple border crossings before final assembly. 

One prominent example comes from the automotive sector. According to reporting from The Wall Street Journal, a single car part may cross the U.S., Canadian, and Mexican borders seven times before being incorporated into a final vehicle sold to consumers. With each border crossing now potentially triggering a new round of tariffs, manufacturing costs have risen substantially, and companies are being forced to reconsider long-standing supply chain strategies (The Wall Street Journal). 

The uncertainty surrounding tariff enforcement has also led to what economists call "planning gridlock" (Investopedia). Research from the Budget Lab at Yale highlights how many businesses have delayed or frozen investment decisions due to unclear policy timelines. Gross Private Domestic Investment (GPDI) data from the Federal Reserve’s FRED database shows noticeable declines in business investment starting in late 2024, a period that coincides with rising tariff threats and uncertainty about future trade relations (Federal Reserve Bank of St. Louis). This reflects widespread corporate hesitation to expand facilities, hire new workers, or commit to long-term contracts amid an unstable trade environment. 

Source: Federal Reserve Bank of St. Louis 

Industries most heavily impacted by these supply chain disruptions include: 

Automotive: Rising production costs as parts now face multiple tariffs (The Wall Street Journal). 

Electronics: Higher input costs from cross-border movement of components (Telegraph). 

Agriculture: Retaliatory tariffs from Mexico and Canada complicate farm exports (Associated Press). 

These factors combined have made North American supply chains more fragile. Many companies are now stockpiling goods, rerouting logistics networks, or exploring alternative suppliers within tariff-exempt regions. While some firms have been able to adapt by building up inventory or reshuffling production schedules, the overall effect has been increased costs, lower efficiency, and reduced competitiveness — precisely the outcomes that modern globalized businesses seek to avoid. 

The disruption caused by the tariffs demonstrates the vulnerability of industries that rely on seamless cross-border trade. Without coordinated trade policy and tariff exemptions that match the realities of integrated supply chains, even a small border tax can cascade into major operational bottlenecks and economic drag. 

Retaliation and Reactions from Mexico and Canada 

Mexico and Canada reactions have been of extreme disappointment with the tariffs that have been imposed on them. Each of the countries' presidents has said, in the strongest possible terms, that they do not agree with these tariffs and will tariff U.S. goods in response to the tariffs being placed on them. Recently making good on their promises, Canada and Mexico have both made started tariffing U.S. goods in retaliation. Each country has had a different approach to tariffing U.S. goods but share a couple of key similarities. They mainly go after goods that have already been tariffed by the United States, and they do not touch USMCA goods, which are covered under the trilateral trade agreement that allows for free trade between the three countries. Around 56% of all trade with Mexico and Canada is non-USMCA compliant, meaning there is a large opportunity for these retaliatory tariffs to cause supply chain disruptions and increase prices. 

Figure 1: Data from USA Trade Online Accessed on April 7th, 2025 

Canada's response to the recent U.S. tariff measures has focused heavily on the automotive sector. In March 2025, the United States imposed a 25% tariff on imported vehicles and auto parts, aiming to support domestic manufacturing. In retaliation, Canada implemented its own 25% tariff on non-USMCA-compliant vehicles and auto parts on April 9th, 2025. Many popular models of vehicles like the Toyota RAV4, Ford Edge and, Honda Civic will all be subject to these tariffs and will likely be subject to price increases in the near future as a result (Reuters). Exactly what these price increases will be is unknown due to the rapidly changing tariffs. It is expected however that the prices for new cars will be raised by as much as 6000 dollars for imported vehicles (Bloomberg). These price increases will affect lower cost models more than higher cost models because there a disproportionately higher percentage of these lower cost cars made outside of the United States. 

Both Canada and Mexico have their own approaches of fighting the tariffs. Canada’s approach is to fight them head on by imposing many of their own tariffs on the goods made in United States trying to scare the United States into reducing their own tariffs by causing greater economic harm and uncertainty. The way Mexico seems to be going about it is to take a more diplomatic approach and try and appeal to the President in negotiations directly in hopes of a deal being made and not making the situation potentially worse by implementing their own retaliatory tariffs hoping that the tariffs will come to an end shortly if they play nicely (Reuters).  However, if the tariffs are going to be kept in place over a longer time frame reciprocal tariffs from Mexico are quite likely. 

There has also been retaliation outside of tariffs. In Canada, there have been outright bans on American alcohol in certain Canadian provinces, leading to a dramatic reduction in alcohol exports to Canada. On March 5th, it was widely reported that several Canadian provinces had taken US made alcohol off shelves in response to the tariffs that the US had put into place. The LCBO, the state-owned and operated alcohol wholesaler in Ontario, Canada’s most populous province, said that it would no longer sell any United States made alcohol. This sort of retaliation can cause a much larger effect than just tariffs alone, and there will likely be a significant reduction in American alcohol consumption in Canada because of this (BBC). This type of retaliation is far different and is far more disruptive than a tariff. We may see more of these types of “embargoes” on certain goods made in the USA if frustration in Canada continues to increase if the tariffs are not removed. 

In the future, there are likely going to be more reciprocal tariffs put in place by the United States, Mexico, and Canada. Until the United States decides that it is no longer in the best interest of the country to continue with the policies focusing on tariffs, they will remain. The United States may back down on some tariffs, and it would not be surprised if we see the tariffs on the auto industry removed or renegotiated to significantly lessen the impact on the U.S. auto industry. 

Conclusion 

In summary, the 2025 U.S. tariffs on Canada and Mexico have caused significant economic impacts far beyond the initial policy goals, straining long-established trade relationships and introducing volatility across key industries. While some sectors, like warehousing and logistics, saw temporary gains, most have faced increased costs and disrupted operations. Automakers, farmers, and manufacturers of consumer electronics are particularly vulnerable, with higher production expenses being passed on to consumers. On a global level, in response to the new tariffs, Canada and Mexico have taken retaliatory measures, including placing their own tariffs on U.S. goods, emphasizing the risks of protectionist policies in a globally interdependent economy. Unless resolutions or renegotiations occur, the continued uncertainty surrounding tariffs could lead to long-term shifts in supply chains, investment decisions, and economic competitiveness across the region.