Trump's 25% Tariffs on Canada and Mexico Will Be a Blow to All 3 Economies
February 4, 2025 - The trading relationship between the U.S., Mexico, and Canada is the most important set of trade relations for all three countries. Canada and Mexico are the United States’ first and second largest export markets with goods exports of $680 billion in 2023, and the U.S. is the largest export market for Canada and Mexico. Exports among the U.S., Mexico, and Canada support over 17 million jobs.
The trading relationship among the U.S., Canada, and Mexico is underpinned by the United States-Mexico-Canada Agreement (USMCA), a new trade agreement that replaced NAFTA and was negotiated and finalized during the first Trump administration. Yet, on February 1, 2025, President Trump imposed 25% tariffs (which were subsequently delayed by one month) on imports from Canada and Mexico and 10% tariffs on energy imports from Canada to address flows of fentanyl and illegal migration. Mexico and Canada have indicated they are preparing retaliatory tariffs, and Trump has stated that he will raise U.S. tariffs further in response. The difference in the negative economic impact from the current 10% tariff on energy imports versus a 25% tariff is relatively small. And given that Canada and Mexico look almost certain to retaliate, likely leading to even higher U.S. tariffs, the following assesses the impact of across-the-board 25% tariffs.
The impact of these tariffs on trade across North America will be particularly impactful, not only because of the large volume of trade that is involved, but also because of the importance of supply chains, which comprise around 50% of intraregional trade. For example, in the production of a Chevy Silverado or Dodge Challenger, components cross borders multiple times before being assembled into a final product. As a result, imposing a 25% tariff every time a product crosses borders adds up quickly.
The following presents the results of simulations based on the Global Trade Analysis Project (GTAP) model under two scenarios. The first scenario assesses the economic impacts on the U.S., Mexico, and Canada with the U.S. imposing across-the-board 25% tariffs on imports from Mexico and Canada with no retaliation from Canada or Mexico. The second scenario assesses the impact of Canada and Mexico retaliating with 25% tariffs on U.S. imports. All economic impacts are estimated to occur over the medium term (i.e., over the next three to five years). Given that U.S. tariffs on imports from Mexico and Canada under USMCA are in most cases close to zero now, a 25% tariff will have significant negative economic shocks for the U.S., Mexico, and Canada. In both scenarios, the economic impact is more severe for Mexico and Canada because a much larger share of their trade is with the U.S.—83% of Mexico’s exports and 78% of Canada’s exports go to the U.S., whereas around one-third of U.S. exports are destined for Canada and Mexico. That said, the economic hit to the U.S. is substantial, with some sectors in particular standing to contract significantly.
These tariffs will also harm the Trump administration’s goal of developing more secure supply chains and competing with China. Continuing to make progress here will require greater trade and investment across North America to strengthen and diversify existing supply chains and reduce reliance on China-centered supply chains. The tariffs are directly at odds with deeper economic integration across North America. In fact, China will benefit from a trade war across North America, as it undercuts efforts to reshore supply chains away from China. More broadly, because these tariffs are most likely inconsistent with USMCA, they signal to the world that any international agreement with the U.S. is not worth all that much, raising difficult questions for all U.S. allies and trading partners about the value of trade agreements with the U.S. One result is that countries will start to hedge—creating new options for trade and investment to insure against an unreliable U.S., which will include being more open to expanding trade and investment relations with China.
Impact of tariffs on economic growth
Figure 1 shows that tariffs would reduce U.S. GDP growth by around 0.25 percentage points, and with retaliation, U.S. GDP growth falls over 0.3 percentage points. With U.S. GDP in 2024 of approximately $23.5 trillion, this amounts to an estimated loss of U.S. economic output over the medium term of around $45 billion from the 25% on imports from Canada and Mexico, and this rises to about $75 billion in lost economic output should Canada and Mexico retaliate. As can be seen, losses to economic growth for Canada and Mexico are around 1.15 percentage points from the 25% U.S. tariffs, and this increases to over 3 percentage points should they both impose 25% tariffs on U.S. imports.

Figure 1
Impact of tariffs on GDP
Percentage point change in real GDP growth, relative to base
Source: Author's calculations
The Brookings Institution
Impact of tariffs on jobs and wages
The tariffs will take a toll on employment in all three countries. Figure 2 shows the job losses from tariffs. In the U.S., employment will decline by 0.11% from the 25% tariffs on imports and rise to a 0.25% loss of jobs with retaliation. Based on 2024 job data, this is equivalent to over 177,000 job losses from the 25% tariff, rising to over 400,000 job losses in the event Canada and Mexico retaliate. Job losses in Canada and Mexico would be around 1.3% and 2.3%, respectively, and based on 2024 jobs numbers, this would amount to 278,000 Canadian jobs and 1.4 million Mexican jobs. In the event of retaliation, job loses would increase to almost 2.5% and 3.6% of total employment in Canada and Mexico, equivalent to over 510,000 Canadian jobs and 2.2 million Mexican jobs.

Figure 2
Job losses from tariffs
% change in total employment, relative to base
Source: Author's calculations
The Brookings Institution
Tariffs will also lead to lower wages across the three countries. In the U.S., wages would decline by 0.2%, and by 0.5% in the event of retaliation. In Canada, wages would fall by over 2.6% and in Mexico by over 4.5% in the scenario of no retaliation, and by 4.9% and over 7% in Canada and Mexico following retaliation by both countries. Worth noting here is that the contraction in demand for labor and decline in wages would be distributed evenly across skilled and unskilled labor, but with a slightly higher impact on unskilled labor.
Impact of tariffs on exports
The impact from tariffs on exports shown in Figure 3 would also be large. U.S. exports to Canada and Mexico would decline by around 6% from a 25% U.S. tariff, and 9% in the case of retaliation. Exports from Canada to the U.S. and Mexico would contract by 9% with a U.S. tariff, and by 19% with retaliatory tariffs. Mexico’s exports would contract by close to 14% and over 25% with retaliatory tariffs.

Figure 3
Impact of tariffs on exports
% change in exports across USMCA countries, relative to base
Source: Author's calculations
The Brookings Institution
Impact of tariffs on inflation
As seen in Figure 4, tariffs would also have an impact on inflation. The tariffs would cause inflation to rise in the U.S. by over 1.3 percentage points. With retaliation, the inflation increase in the U.S. would be less at around 0.8 percentage points, but still significant, reflecting the greater slowdown in U.S. economic growth. In the case of Canada, inflation would decline as U.S. tariffs lower economic growth, but should Canada then impose 25% tariffs, inflation would increase, reflecting the impact on the price of imports from the U.S. In the case of Mexico, there is also significant decline in inflation of 9% following U.S. tariffs, reflecting the impact of lower economic growth, and this decline is reduced to around 6 percentage points should Mexico put a 25% tariff on U.S. imports.

Figure 4
Impact of tariffs on inflation
Percentage point change in consumer prices, relative to base
Source: Author's calculations
The Brookings Institution
Sectoral impacts of tariffs
The results presented earlier show the impact on the aggregate economies. The negative impact on exports is widely dispersed across sectors, the bottom line being that all three countries experience significant sector-wide contractions in exports.
The following presents some of the sector-specific trade results. Given that there are no tariffs proposed between Canada and Mexico, and as the vast majority of their exports are to the U.S., the following analysis focuses on the impacts on U.S. exports to Canada and Mexico, and the impacts on Canadian and Mexican exports to the U.S. To start, the trinational integration of many of the sectors through supply chains means that many of the sectors affected by these tariffs are common across the three countries. Moreover, many of the sectors affected produce manufacturing and other business inputs, such as metals, computers, and machinery equipment. Raising the costs of these exports will therefore increase costs for businesses in all countries, reducing their competitiveness, and lead many businesses to instead source inputs from other countries, including those in Asia.
In the U.S. for example, as shown in Table 1, exports across mining, manufacturing, lumber, and metals would all suffer large contractions in exports. U.S. mining exports to Canada suffer an almost 60% decline in exports, and following retaliation, U.S. mining exports are almost completely wiped out, with a 97% contraction. There is a 25% contraction in U.S. motor vehicle exports to Canada that increases to 55% with retaliation, and products in “other transport” fall by 18% following U.S. tariffs and by 79% with retaliation. In the electrical equipment sector, the 12% decline in exports from the electrical sector will turn into a 30% plus decline with retaliation.

Table 1
Source: Author's calculations
The Brookings Institution
Table 2 shows that U.S. exports to Mexico also fall across manufacturing, lumber, foods, and metals in particular, but almost every sector experiences a large contraction in exports. For example, U.S. exports of nonferrous metals such as copper, aluminum, zinc, and gold decline by 35% following the U.S. tariffs and then by 78% with retaliation by Mexico. U.S. exports of manufactured products—computers and electronics, motor vehicles, electronic equipment, other transport—all suffer large declines. For example, there is a 31% decline in exports of computers and electronics, and with retaliation, these U.S. exports fall by over 80%. Exports of motor vehicles also decline by 23% with tariffs and then by 65% following retaliation.

Table 2
Source: Author's calculations
The Brookings Institution
Table 3 shows some of the key sectors where Canada’s exports to the U.S. would contract across manufacturing, mining, textiles, rubber, and plastics. For example, exports of electronic equipment and electronics decline by over 70% following U.S. tariffs and by close to 80% with retaliatory tariffs. Exports of “other transport” decline by 70% with tariffs and 74% with retaliation, and motor vehicle exports from Canada decline by 53% with the U.S. tariffs and by 68% with retaliatory tariffs. The top five contraction in Canada’s exports.

Table 3
Source: Author's calculations
The Brookings Institution
The decline in exports from Mexico are across mining, the auto sector, electrical equipment, rubber and apparel, and textiles. For instance, Mexico’s mining sector exports suffer contractions of over 90%. The pharmaceutical sector also contracts over 60% with tariffs and over 70% following retaliation. Mexico’s exports of motor vehicle and electronic equipment sectors also contract significantly, a common outcome for all three countries given the supply chains in these sectors, with exports falling 40% and 55%, respectively, and with the retaliation, exports of these products fall by 50% and 62%.

Table 4
Source: Author's calculations
The Brookings Institution
Conclusion
The U.S. tariff of 25% on imports from Canada and Mexico is going to reduce U.S. economic growth, reduce jobs, cause wages to fall, and prices to rise, and retaliation by Canada and Mexico will multiply the economic harms across the three countries. President Trump has said that these tariffs are in response to flows of fentanyl and illegal immigrants from Mexico and Canada. The problem with these tariffs is that they impose immediate costs on U.S. consumers, workers, and businesses without a clear link between these tariffs and how they will reduce flows of immigrants or fentanyl.
Moreover, these tariffs will harm the Trump administration’s goal of developing more secure supply chains and competing with China. More broadly, because these tariffs are most likely inconsistent with USMCA, countries will start to hedge—creating new options for trade and investment to insure against an unreliable U.S., which will include being more open to expanding trade and investment relations with China.
Unless the Trump administration resolves its issues with Canada and Mexico and unwinds these tariffs quickly, the economic, diplomatic, and strategic harms from the tariffs will be substantial.