President Trump announced his plans to impose 25% tariffs on all goods imported from Canada and Mexico. We should take his announcement with a grain of salt—or maybe a whole shaker—but there’s no doubt that the new president will boost many tariffs.
Last year the U.S. imported $419 billion of goods from Canada and $475 from Canada. If volumes and prices don’t change, the tariff will bring in $224 billion in revenue, equal to $667 per person. This static view will not be what actually happens, but it’s a good starting point.
It’s unclear whether Trump plans to also tax services; they are not included in the figures above. The United States exports more services than it imports.
On the face, the Canada-Mexico tariffs would push prices up for goods that Americans buy. There would likely be some price concessions by Canadian and Mexican sellers of goods. However, global competition in goods prevents profit margins high enough to enable foreign producers to eat the entire cost of the tariffs. They may respond with some discounts, but most of the tariffs will be paid by American consumers. That’s also true of goods imported by companies for further processing; they will pass on the higher cost of materials to their customers, who are mostly American.
U.S. consumers will shift their spending, when possible, to goods from other countries. Much of this will happen without consumers knowing anything about the tariffs. A shopper usually looks at price, quality and availability. When there are choices, the buyer opts for the less expensive product. It won’t take too long for stores to stop stocking products not favored by consumers.
People buy Canadian and Mexican products now because they offer the best value; if they didn’t, consumers would not buy the goods. When spending is shifted to other goods, that’s a cost to consumers that does not show up in tariff revenue. That is, consumers are not purchased what would have been their first choice.
In addition, American producers of goods that compete with Canadian and Mexican imports will have room to boost their prices. That also will be a cost to consumers that does not show up in tariff revenue.
So tariff revenue will not be as high as our initial arithmetic shows, but the loss of consumer welfare will be in the ballpark of that initial figure.
Canada and Mexico are our two largest sources of imports, and also the two largest markets for our exports. Increased tariffs often trigger retaliation by the affected countries, which would reduce U.S. exports. Lower export volumes will lead to lower employment and earnings in the production of U.S. goods, partially offset by greater production of the tariffed goods. Net net, the United States economy will be worse off.
A further complication comes from future negotiations. President Trump likes to make deals. He will likely back off on the tariff plan in exchange for concessions from Canada and Mexico. It’s hard to say now whether those concessions will be substantive or cosmetic, but some kind of deal is likely.
The magnitude of this latest tariff pronouncement is unlikely to be big enough to justify changing our economic forecast. The economy is large, dominated by domestic activity rather than foreign trade. However, businesses involved in imports and exports must pay close attention to the details as they emerge. Other businesses that operate in close proximity to importing and exporting companies should also monitor the tariff situation. Proximity can be geographic or reflect products that are related.
However, most businesses can ignore this bit of drama.