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WHAT THEY MEAN:

Some strange pre-Thanksgiving belligerence against Mexico/Canada/China: Mr. Trump threatens via social media to break up the 2019 “U.S.-Mexico-Canada” agreement by imposing 25% tariffs on Canadian and Mexican goods over migration and drug issues, with China thrown in as well.  (For reference, here’s the text of USMCA’s core commitment from Article 2.4: “[N]o Party shall increase any customs duty, or adopt any new customs duty, on an originating good.”)  It’s not clear how seriously to take this – see below for some likely national impacts and personal adjustments – but here’s some background:

Data: Canada and Mexico buy about a third of all American exported goods. Canada is the top export market for 36 U.S. states and Mexico for another six, including the four border states Texas, Arizona, New Mexico, and California. By one measure, New Mexico is most reliant of all states on Mexican customers, who buy $3.5 billion — 70% — of their $5 billion in total overseas sales.  By another, it’s Texas, whose massive $130 billion in exports to Mexico is 5% of state GDP, even before adding the $36 billion in Texan sales to Canada.  North Dakota meanwhile relies most heavily on Canada – 82% of $8.8 billion in worldwide exports of wheat, oil, farm machinery, etc. — with Maine, Michigan, and West Virginia all around 50%. To give the overall picture, U.S. export data in 2023 looked like this:

A big tariff on incoming goods from Canada and Mexico would have three basic effects.  The most direct would be higher U.S. prices, especially in the energy, car, appliance, and food industries that make up the largest share of North American trade.  Mexico, for example, is the U.S.’ largest source of winter vegetables and fruit, supplying grocery stores this past February with 188,640 tons of tomatoes, 128,330 tons of peppers, 106,460 tons of avocadoes, 44,440 tons of lemons and limes, and other fresh produced valued at $2.25 billion — along with TV sets, cars, and home appliances, plus more cars, the largest single stream of energy imports, beef, cooking oil, and beer from Canada.  The second and third effects are less direct but predictable: American exporting factories, labs, farms, ranches, and mines with Canadian and Mexican customers would (a) risk retaliation in kind, and (b) lose customers as Mexican and Canadian firms reliant on U.S. goods go bankrupt or lose out to competitors elsewhere in the world.  Some illustrative examples:

Energy and Price Increases: Energy is the largest single import from Mexico and Canada.  In 2023, American refineries and power plants bought $145 billion worth of crude and refined oil, gas, and electric power from the two countries. This was about 60% of all U.S. energy imports. ($122 billion from Canada, $23 billion from Mexico.)  A 25% tariff on Mexican and Canadian energy adds a face value of $36 billion. Some might be replaced over the course of 2025 by Persian Gulf oil at market prices; on the other hand, the tariff itself might raise world market prices.

Export Losses (1) – Agriculture and Retaliation: When one country imposes tariffs on another’s goods, particularly in violation of an existing agreement, the offended country frequently retaliates by doing the same thing. The 2018/19 bout of tariffs on steel and most Chinese-made goods brought retaliatory tariffs against U.S. goods in China, the European Union, India, Turkey, and several other countries. Some U.S. firms responded by moving overseas to dodge the hit; Harley-Davidson, for example, moved some of its bike production from Milwaukee to India to avoid the EU tariffs. Others didn’t have that option.  Farmers, unable to move production and then as now selling lots of products to China, took a heavier blow, leading the first Trump administration to institute a $20 billion annual reparations program for their lost income. Canada and Mexico now buy a third of all U.S. farm exports, and adding China in brings the total to half of last year’s $174.2 billion ag export total, putting about 10% of all U.S. farm income at risk.

Export Losses (2) – New Mexico Manufacturing and Customer Loss: Retaliation, though, wouldn’t be the only harm to come from the breakup of USMCA.  Lots of American exports to Canada and Mexico — hundreds of billions of dollars worth of them, mainly in sophisticated manufacturing — go not to Canadian and Mexican homes and consumers but to industrial buyers.  For example, New Mexico’s $3.5 billion in exports to Mexico includes $1.7 billion in computer parts, $230 million in magnetic and optical media, $290 million in electrical components, and $190 million in semiconductor chips — that is, high-tech inputs bought by Mexican auto plants and factories assembling refrigerators, computers, and other appliances, and consumer electronics. Imposing a high 25% tariff on the resulting cars and TVs as they flow back to the U.S. will naturally cut sales and, therefore, reduce not only the makers’ production and job counts but those of their suppliers in Las Cruces, Albuquerque, and the just-opened Rio Rancho semiconductor fab.

New Mexico’s risks, though probably particularly high, are typical rather than unusual. How much of North Dakota’s $580 million in farming machinery exports to Canada would survive? Ohio’s $21.8 billion in exports to Canada, with its $5 billion worth of metals and auto parts destined for Ontario and Quebec auto plants? What fraction of Texas’ $10.8 billion in semiconductor chips, $5.1 billion in electrical equipment, and $7.0 billion in auto parts to Mexico?

To sum up: Among big powers, the U.S. is unusually fortunate in having friendly and peaceful relationships with its two large neighbors.  These involve deep and complex economic ties, which often raise policy problems and challenges but, in general, serve all three countries well.  Replacement of the earlier North American Free Trade Agreement with the “USMCA” in 2020 has had mixed results — some useful innovations, also some things that seem to be working less well and may have been over-negotiated. If the agreement is still there next year, its scheduled review in 2026 might help fix some of the problems. Abandoning it to provoke an economic shock and pick fights with neighbors and allies, though, is much more likely to inflame than ease border problems – and generally seems unsound and a bad idea. Again, it isn’t clear how serious this really was.  But just in case, and moving from unwise national policy to its possible personal impacts: make the down-payment this month if you’re buying a car or refrigerator, and with heating and gas as well as food prices maybe about to jump, take some time in mid-January to fill your tank and stock up on groceries.