By Santiago Pérez and Anthony Harrup in Mexico City and Vipal Monga in Toronto.
Canada and Mexico prepared to retaliate over tariffs from President Trump, as the U.S. and its neighbors spiraled into a trade war that threatens to hurt American consumers and upend decades of economic integration.
The U.S.'s new 25% tariffs on all goods and 10% duties on energy products will inflict severe damage on America's neighbors to the north and south. The tariffs risk pushing the U.S.'s top trading partners into recession, as both nations send 80% of their exports to America. The Canadian dollar and the Mexican peso are likely to weaken against the U.S. dollar.
Their strategy is to make sure Americans feel the pain too. But they are likely to focus on what experts call precision strikes against U.S. exports from Republican strongholds and industry groups with political leverage in Washington.
Late Saturday, Canadian Prime Minister Justin Trudeau said his country would impose 25% tariffs on more than $105 billion of U.S. goods. "We didn't ask for this, but we will not back down," he said, warning that American jobs in their auto and manufacturing industries were at risk.
A first wave, set to take effect Tuesday, will hit $20 billion of imports from the U.S., including alcohol, coffee, clothing and shoes, furniture and household appliances. On Sunday, Canada released a list of tariff targets, including products from Republican-leaning states, such as whiskeys from Kentucky, oranges from Florida and appliances from South Carolina. Government officials on Sunday also said they were targeting motorcycles in Pennsylvania, which has a Harley-Davidson plant in York, Pa.
A second wave on an additional $85 billion of goods would include tariffs on cars and trucks, agricultural products, steel and aluminum and aerospace products. The second phase will begin in three weeks, to give businesses enough time to stockpile and find alternatives.
Two Canadian provinces said they would join in the effort too, with Ontario and British Columbia moving to block the sale of U.S. wine, spirits and seltzers. Ontario alone is one of the biggest buyers of U.S. alcoholic beverages, selling almost $700 million of them every year, said Doug Ford, the provincial leader.
Trudeau said that he spoke with Mexican President Claudia Sheinbaum and that both leaders agreed to work together to deal with Trump's actions. Sheinbaum said Mexico's response will include tariff and nontariff measures, which aides said would be outlined in the coming days.
One option Mexico's government is considering is so-called carousel retaliation, which would periodically rotate the U.S. products subject to retaliatory tariffs, one official said. This generates uncertainty in U.S. export sectors and has a political impact when hitting sectors such as agriculture that are likely to lobby Congress.
Canada held back on a measure that could have had a bigger impact on the U.S. -- putting export taxes on oil and gas to raise the cost for U.S. consumers. Alberta, where most of Canada's oil is produced, has resisted any idea of limiting exports to the U.S. A government official said Trudeau wanted to present a unified front and didn't want to alienate Alberta.
With much smaller economies, Mexico and Canada can't impose the same impact on the U.S. economy. But they are betting they can inflict enough reciprocal suffering that Trump, who campaigned on lowering prices after a period of elevated inflation, will back down.
A trade war would hit U.S. income, hurt employment and increase inflation, said the Peterson Institute for International Economics.
U.S. inflation, at 2.9% in December, is still running higher than the Federal Reserve's 2% target. The Peterson Institute estimated that U.S. inflation would be 0.54 percentage point higher with the tariffs this year than without. The U.S. depends on Canada for most of its imported oil, which is refined into gasoline in the Midwest, while Mexico is a supplier of everything from fruits, vegetables, meat and beer to electronics, household appliances and medical equipment.
On Sunday, Trump acknowledged the potential impact of his measures. "Will there be some pain? Yes, maybe (and maybe not!)" he wrote on his Truth Social platform. "But we will Make America Great Again, and it will all be worth the price that must be paid," he added.
A senior Canadian government official said Canada felt it had to go big enough to respond to Trump's maximalist approach. The official noted that U.S. tariffs are in some ways like a 2022 border shutdown when truckers protested government Covid-19 measures by blocking border crossings. U.S. auto factories had to quickly halt production.
"The key to retaliation is that they don't affect your country's economy and consumer prices, and that your retaliatory duties have an economic and political impact on the U.S.," said Kenneth Smith Ramos, a former top Mexican trade official.
Retaliation worked in 2018, when Mexico responded to U.S. tariffs on steel with tariffs of its own that included steel, pork, cheese, apples and bourbon. The U.S. eventually backed down.
Trump's executive order on tariffs includes a clause that will allow the U.S. to raise the tariffs if Mexico or Canada retaliates. The White House said the duties would remain in place until Mexico, Canada and China stop fentanyl smuggling and illegal migration. "The Mexican drug trafficking organizations have an intolerable alliance with the government of Mexico," the White House said.
Sheinbaum rejected what she called "the White House's slander" about Mexico causing the U.S.'s fentanyl problem. She proposed the creation of a binational working group made up of public-health and security officials from both countries.
"Problems are not resolved with tariffs, but by holding dialogue," she said. "Mexico does not want confrontation."
Canadian officials also dispute Trump's claims about fentanyl. Trudeau has noted that the drugs seized at the Canadian border are a fraction of those caught at the southern border. The U.S. Border Patrol seized 46 pounds of the opioid at the northern border last year, compared with 21,000 pounds seized at the southern border with Mexico.
On Sunday, Canadian Finance Minister Dominic LeBlanc said he is skeptical that fentanyl trafficking is Trump's actual concern. "I wonder if that's the actual pretext" for the tariffs, "or if there's another policy objective that they're pursuing," he said, in a CTV News interview.
Despite tough talk from Trudeau and Sheinbaum, the hit to Canada's and Mexico's smaller economies is likely to land much harder than in the U.S. Capital Economics, the London-based research firm, said Canada's GDP could fall as much as 3%, while Mexico's could suffer a 2% drop.
Canada and Mexico have staked their economies on free trade with the U.S. and North American integration. Their share of the U.S. import market grew faster after the U.S. entered a trade war with China.
The tariffs imposed by the U.S. will undermine nearly half a century's efforts to build a North American common market, said Tom Shannon, who served as undersecretary of state for political affairs in the first Trump administration. "Trump is splintering an effort to build a trilateral approach to trade," he said.
Mexico was the U.S.'s largest trade partner in 2023. Canada was the second largest. The U.S. ran trade deficits with both countries -- $152 billion with Mexico and $64 billion with Canada, according to the U.S. Census Bureau.
"It's going to have a huge impact on us," said Randy Carr, chief executive of Florida-based embroidered-patch manufacturer World Emblem, which has a plant in Mexico.
The company has stopped capital spending and hiring. Moving production back to the U.S. would depend on whether it is more economically viable than paying the tariffs, he said. "Whether we can do it without having price increases remains to be seen," Carr said.
Supply chains in the highly integrated auto sector face significant disruption because tariffs have an expansive impact. Mexico supplied about 42% of U.S. imports of auto parts last year and Canada almost 13%. With auto parts going back and forth among the three countries several times, tariff costs risk surging well above 25%, industry experts say.
"Trump is taking aim at Canada and Mexico, but it's a direct hit on Michigan, Ohio, Indiana, Tennessee, any state where they make autos," said Flavio Volpe, president of Canada's Auto Parts Manufacturers' Association. "It's impossible to be profitable tomorrow with tariffs on Canadian and Mexican parts. And the only thing more impossible is to replace them within 18 to 24 months."
-- Paul Vieira in Ottawa contributed to this article.
Write to Santiago Pérez at santiago.perez@wsj.com, Anthony Harrup at anthony.harrup@wsj.com and Vipal Monga at vipal.monga@wsj.com
(END) Dow Jones Newswires
February 02, 2025 15:42 ET (20:42 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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