A granular view at US trade with Canada, Mexico and China

After launching a “historic action to kick of America’s golden age” in the first 100 hours in office, on March 4, 2025, Donald Trump imposed a 25 percent tariff on all goods imported by the two largest US trading partners – Canada and Mexico – and lifted the across-the-board tariff on Chinese goods from 10 percent to 20 percent. There is still a lot of uncertainty around the persistence and extent of this action. But if Donald Trump was serious about these tariffs, they are likely to cause non-negligible economic damage for all parties involved, the US included. However, as the tariffs hit differently the various parts of the economy, this comment shows which US industries and consumer groups are likely to be particularly affected.

1. Busy time in the office

It has been a very busy start to the new term in office for US President Donald Trump. In his effort to quickly deliver on the electoral promises, Donald Trump signed more executive orders on his first day in office than any other president in history.

Among the flagship achievements, according to the White Hose estimates, the President secured over USD 1 trillion in new investment, including USD 500 billion for an AI infrastructure project (with Softbank CEO Masayoshi Son, Oracle co-founder Larry Ellison and OpenAI CEO Sam Altman), USD 600 billion for – unspecified – investment from Saudi Arabia over the next four years, and a declaration from Stellantis to restart an assembly plant in Illinois and build the new Dodge Durango in Detroit.¹

Although this investment plan may lead to positive growth impulse, the latest move to instigate a fully fledged trade war against America’s main trading partners – Canada, Mexico and China – could rapidly erase any growth hopes.

There is admittedly still a lot of confusion about Trumps tariff strategy. After a one-month delay, on March 4, Donald Trump imposed a 25 percent tariff on all goods imported by two largest US trading partners – Canada and Mexico – and lifted the across-the-board tariff on Chinese goods from 10 percent to 20 percent. However, on March 6, Donald Trump signed an executive order granting a 30-day exemption (until April 2) for tariffs on all products from Mexico and Canada that are covered by the USMCA (USA-Mexico-Canada) free trade treaty. It remains unsure what will follow after April 2. However, even excluding the latest exemption, America’s average tariff level is now the highest since the 1940s (Fig. 1).

Retaliatory measures have already been announced. Canada imposed different measures, among which a 15 percent tariff on US agricultural products, and decided to keep these measures in place unless the US completely rolls back its tariffs. China introduced a 25 percent tariff on USD 30 billion of imported goods from the US. Mexico was initially expected to mount retaliatory tariffs on March 9, but suspended these plans upon the 30-day exemption.

2. Aggregate economic impact of the trade war

If this trade war materializes its potential, it is likely to have significant economic consequences. Tariff announcements and the consequent uncertainties on the exact trade policy strategy by the US administration have already triggered a stock market selloff, pulling the Dow Jones Industrial Average into the red for 2025.

The immediate capital market reaction will be followed by various real economic repercussions. Estimates by the Budget Lab –  a non-partisan policy research center in the US – of the total effect of the latest tariffs on Canada, Mexico and China suggest 0.6 lower real GDP growth in 2025 and 0.3-0.4 percent smaller US economy in the long run. The same estimates forecast a 1.0-1.2 percent rise in the US price level and an average consumer loss per household of USD 1,600-2,000 (in constant 2024 USD) in the short run.² However, since tariffs are regressive taxes, the distribution of losses will likely be skewed towards households with the lowest level of income.

The negative economic effects would not be limited to the US economy but would hit the US trading partners through different channels. Quite obviously, Canada, Mexico and China would face the largest direct damage via a decline in their exports in the medium term of up to 28 percent for Canada and 35 percent for Mexico. The export decline in China would be much smaller of up to 4 percent.³ Also Germany could be affected, albeit with a small but ambiguous impact. On the one hand, the US tariffs reduce Canadian and Mexican demand for German goods. On the other hand, German exports could partly displace Canadian, Mexican or Chinese exports. However, due to tariffs on US imports of steel and aluminum from the EU, imposed on March 12, and due to further threats against the EU, Germany could be soon drawn into the negative maelstrom of the trade war. In 2024, Germany was the fourth largest among the main exporters to the US, with ca. USD 163 billion of goods sold to the US (Fig. 2).

3. What stays behind the aggregate effects?

To better understand the underlying effects, a closer look at bilateral trade flows  by product category is helpful. Figures 3 – 5 show 10 Harmonized System (HS) 2-digit product categories with the highest value of US imports from its three main trading partners, Mexico, Canada and China, respectively. A few important observations emerge. First, three product categories, namely 84, 85 and 87 are particularly hit by the newest tariffs. All three are imported to the US from Mexico, Canada and China. The total value of imports from the three countries affected by Trump’s tariffs amounted to USD 221.3 billion for category 84, USD 225.9 billion for category 85, and USD 206 billion for category 87.

The tariff-induced distortion for the US economy could be insofar large that products belonging to these categories are used as production inputs in important US industries. Specifically, automobile manufacturing, aerospace & defense, industrial machinery & equipment, computer & semiconductor manufacturing, oil & gas sector, but also service sectors, such as logistics & transportation, and construction all require (precision) machinery (HS 84), electrical components (HS 85) and (specialized) vehicle parts or transport equipment (HS 87). Shortages of these products due to a trade war might induce rising production costs, which will ultimately be passed on to consumers. However, inflationary pressures might be more direct since some product categories – like cars, meat, pharmaceuticals, computers and smartphones – are also end-consumption goods.

At a more disaggregated level, Table 1 – 3 take categories 84, 85 and 87 as case studies and show detailed US imports of products in the respective category, sourced from Mexico, Canada and China, with the highest import values.4

Imports from the first two categories of machinery and appliance products are particularly high and concentrated in only one sourcing country (Tab. 1). These products are intermediate inputs in manufacturing and industrial automation, IT & software development as well as for service provision of financial services and data processing, healthcare and medical technology, telecommunications, and research and education. Disruptions in the provision of these products would have broad implications in core manufacturing and service sectors in the US economy.

Similar negative repercussions can be expected from supply disruptions of electrical products (Tab. 2). Several production processes and services – from telecommunications & IT infrastructure through automobile assembly to healthcare & medical equipment – are strongly dependent on parts and products classified in this category.

Finally, product categories listed in Table 3 refer to passenger and good transportation vehicles and to essential components in assembling passenger and transport vehicles. Tariffs imposed on these products – mainly sourced from Mexico and Canada – are likely to lead to two important effects. Prices of imported passenger and transportation vehicles in the US could rise, negatively impacting end consumers and businesses across the economy. Moreover, higher prices for parts and components may significantly increase costs for US automobile manufacturers, ultimately leading to price hikes for cars assembled in the US.

There is also not much of a fallback option for the US to work around the potential supply shortages. Almost 53 percent of overall US imports of products from category 87, 46 percent from category 85 and 41 percent from category 84 are sourced from Mexico, Canada and China taken together. Even if the remaining trading partners were in principle willing to substitute for the shortfall in exports it is doubtful that they would possess enough productive capacity, as well as varieties and qualities required by US companies.

Conclusions

The impact of the ongoing trade war on markets and the economy is uncertain as it strongly depends on if and how long the envisaged and partly imposed tariffs are in place and how many new war episodes are going to happen. Two broad scenarios are conceivable.

Provided that the tariff exemption from March 6, 2025 will turn to be permanent, the residual tariffs on US imports and retaliatory measures from Canada and China are removed in the coming weeks and no new tariffs are levied, the impact on the US economy and on the rest of the world could be contained.

However, Donald Trump repeatedly demonstrated impatience when accused of being wrong about his love for tariffs. This makes the alternative scenario of trade war for longer increasingly probable. Accordingly, the negative impact on the US and the global economy will be more significant. In the US, the automobile sector and construction activities are likely to suffer the most. But also other manufacturing and service sectors, as well as end consumers would bear – directly or indirectly – the cost of Trumps protectionist mantra.

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¹ For more details about the first 100 hours in office and the “historic action to kick off America’s golden age”, see https://www.whitehouse.gov/presidential-actions/2025/01/the-first-100-hours-historic-action-to-kick-off-americas-golden-age/

² This is a short-term, pre-substitution effect (before consumers shift their spending). Post-substitution effect amounts to USD 1,100-1,400 average consumer loss per household. For details on the underlying estimations, see “The fiscal, economic, and distributional effects of 20% tariff on China and 25% tariffs on Canada and Mexico”, available at: https://budgetlab.yale.edu/research/fiscal-economic-and-distributional-effects-20-tariffs-china-and-25-tariffs-canada-and-mexico

³ These estimates are based on ifo’s Trade Model, published in a press release on February 4, 2025.

⁴ Tables A.1 – A.3 in the Appendix show a more detailed list, with products for which US imports exceed one billion USD.