Analysis: Are Trump's tariff plans for Canada and Mexico real threats?

"The most beautiful word in the dictionary is tariff," Donald Trump declared on his campaign trail last October. "It's my favorite word."

Trump pledged on November 25 that once he assumes the presidency on January 20, he would sign an executive order to impose sweeping tariffs of 25 percent on all imports from Canada and Mexico, the country's two neighbors and largest trading partners, citing the need to address the "long-simmering problem" of illegal immigration and drug trafficking into the U.S.

With less than a week before his inauguration, Trump on Tuesday announced his plan to establish a new department called the "External Revenue Service" to collect "tariffs, duties and all revenue" from foreign countries on Day 1 at the White House in a move to follow through his long-held commitment to imposing tariffs on trading partners.

How have Canada and Mexico responded? And how will Trump's tariff threats impact the United States-Mexico-Canada Agreement, or USMCA, signed during his first term in office?

Canada: Everything is on the table

Days after the U.S. president-elect threatened Canada with the hefty 25 percent tariffs, Canadian Prime Minister Justin Trudeau reportedly made an unannounced visit to Trump and the pair had a dinner at Mar-a-Lago on November 29.

According to media reports, during the dinner, Trump floated the idea of making Canada the 51st state of the United States and mocked Trudeau, addressing him as "governor" of Canada.

"I look forward to seeing the governor again soon so we can continue our in-depth discussions on tariffs and trade," Trump wrote in a post on his social media platform, Truth Social, last month.

Trump continues to suggest merging Canada with the U.S.  Meanwhile, Trudeau, now an outgoing prime minister of Canada, has firmly rejected the notion, emphasizing that Canada values its sovereignty and the strong trade and security relationships between the two nations.

In an interview with the U.S. cable news channel MSNBC on Sunday, Trudeau said Trump's annexation threats serve as a diversion from the economic consequences that a trade war will impose on American workers and businesses.

"And perhaps the idea of a 51st state is distracting a little bit from a very real question that will increase the cost of living for Americans and harm a trading relationship that works extremely well," he said.

Trudeau said introducing a 25 percent tariff could raise energy prices for American households. "No American wants to pay 25 percent more for electricity or oil and gas coming in from Canada," he said.

Canada is the top U.S. partner for trade in goods and services. According to a U.S. Congressional Research Service (CRS) report updated on Tuesday, Canada exported 77 percent of its goods to the U.S. and imported almost half of its goods from there in 2023.

Canada is also the largest supplier of U.S. energy imports – including crude oil, natural gas, and electricity. Canada's share of U.S. crude oil imports by quantity increased from 33 percent (924 million barrels) in 2013 to 60 percent (1.4 billion barrels) in 2023, according to the CRS report.

When asked whether the Canadian government would cut off energy exports to the U.S. in response to Trump's tariff threat, Canadian Foreign Affairs Minister Melanie Joly said Ottawa is not ruling out any countermeasures. "Everything is on the table," she said.

Trudeau on Sunday also vowed that Canada would respond with retaliatory tariffs as it did in Trump's first term. Canadian officials are reportedly preparing a list of American products, including steel, ceramics, and orange juice, that could be targeted with retaliatory tariffs.

The Canadian Chamber's Business Data Lab estimates that if Trump follows through on his promise to increase tariffs, Canada will retaliate with tariffs of its own. The move could reduce the U.S. GDP by $467 billion, with an average loss of $1,300 per American, it said.

Canadians also warned that Trump's tariffs could hurt American consumers more than Canadian producers. A Canadian told CGTN Stringer that "this policy will not really harm Canadian producers and farmers, but rather it will probably harm the American people because they will be the guys who will pay the price of these tariffs."

Another expressed skepticism about the tariffs being implemented. "I think President-elect Trump is making his force known before he takes office. If we look back four years ago when he took office first time, a lot of things were said, but not a lot of things follow through."

Near-shoring shock for Mexico

In an open letter addressed to Trump in response to his proposed 25 percent tariffs in November, Mexican President Claudia Sheinbaum emphasized the need for cooperation and mutual understanding to address significant challenges like migration and the fentanyl epidemic rather than resorting to threats or tariffs.

Citing the need to protect U.S. auto manufacturers by blocking the sale of Mexican-made vehicles in the United States, Trump had also threatened to impose tariffs exceeding 200 percent on vehicles imported from Mexico on his campaign trail.

"All I am saying is, 'I will put 200 or 500, I do not care.' I will set a number where they cannot sell one car," Trump said, according to Mexico Business News.

Mexico is the United States' largest trading partner. It first took that rank in 2023, when the annual trade volume between the two countries exceeded $800 billion. The country has benefited from the U.S. strategy of near-shoring in place of offshoring as a means to address so-called supply chain vulnerabilities.

Data from the U.S. Department of Commerce shows that U.S. imports from Mexico increased by 5 percent year-on-year, reaching $475 billion in 2023.

The primary products of Mexico's exports to the United States are computers, cars and motor vehicle parts and accessories. Meanwhile, the key products the U.S. exported to Mexico are refined petroleum, motor vehicle parts and accessories, and petroleum gas, according to the Observatory of Economic Complexity (OEC), a leading data visualization tool for international trade data.

Emmanuel Loo, acting head of the Ministry of Economy of Nuevo León State of Mexico, recently said Trump's threat to slap a 25 percent tariff on imports from Mexico is unrealistic. He noted that Nuevo León is one of Mexico's major industrial centers, with about half of the household appliances consumed in the U.S. being produced there.

Loo explained that such tariffs would severely damage Mexico's key manufacturing sectors, like the automotive industry, disrupt the stability of supply chains in North America, and cause American consumers to ultimately bear the increased tariff costs.

During Trump's previous term, he made similar threats to impose tariffs on all Mexican imports. Although these threats were not acted upon, they strained U.S.-Mexico relations and added uncertainty to bilateral trade, he said.

Uncertainty surrounding the USMCA trade deal

Trump's repeated tariff threats on Canada and Mexico would impact the region's economic stability and pose "a direct challenge" to the spirit of cooperation and understanding of the United States-Mexico-Canada Agreement, the Employers' Confederation of the Mexican Republic (Coparmex) has warned.

The tariff threats generate uncertainty in strategic sectors and jeopardize millions of jobs reliant on trade between the three countries, said Coparmex in November.

According to the U.S. Census Bureau, Mexico and Canada are the United States' top two trading partners, and under the framework of the USMCA, the trade in goods amounted to a staggering $1.6 trillion in 2023.

After Trump first assumed office as the U.S. President in January 2017, he criticized the North American Free Trade Agreement (NAFTA) for increasing the U.S. trade deficit and shifting thousands of manufacturing jobs to lower-wage Mexico and threatened to impose high tariffs on Mexican and Canadian steel and aluminum products in demanding a renegotiation.

During his first term, he succeeded in renegotiating NAFTA, leading to the signing of the USMCA in September 2018. The USMCA officially took effect on July 1, 2020, replacing the over two-decade-old NAFTA.

Compared to NAFTA, the USMCA includes more favorable terms for the U.S. For instance, 75 percent of the automobiles or key components must be produced within the USMCA region, up from the previous 62.5 percent under NAFTA.

Additionally, stricter rules of origin were implemented, ensuring that only qualifying vehicles could enter the U.S. duty-free; otherwise, the U.S. could impose tariffs according to World Trade Organization rules. Furthermore, 40-45 percent of auto parts must be made by workers earning at least $16 per hour, aiming to curb the shift of jobs to Mexico.

The USMCA is set to be reviewed in 2026 by the U.S., Canada, and Mexico to decide whether to renew or amend the agreement.

Trump might be leveraging the threat of tariffs to push for an early renegotiation of the USMCA, said William Reinsch, a former president of the National Foreign Trade Council of the United States.

"This strikes me more as a threat than anything else," Reinsch said. "I guess the idea is if you keep hitting them in the face, eventually they'll surrender."