A Tale Of Two Trading Partners

Just before the New Year, Canadian Foreign Affairs Minister Melanie Joly and Finance Minister Dominic LeBlanc travelled to Palm Beach, Florida, for discussions with the incoming Administration about the effects a 25-percent tariffs on all Canadian goods. That followed a November visit from the Canadian Prime Minister himself on the same subject. But each minister has returned home without any assurances.

The same tariffs have been aimed at Mexico, but the Mexican government appears to be in no hurry to negotiate any terms to forestall the announced tariffs. Instead, Mexico is highlighting the dwindling trading options the United States has for replacing China’s role in international supply chains.

The Canadian government of Prime Minister Justin Trudeau outlined a $900 million plan to fortify its border with the United States. The proposal includes the use of drones, helicopters and other technology to watch over the 5,525-mile border, as well as canine units to check for drugs.

No such proposals from Mexico. The wildly divergent approaches make it difficult to predict how and when such tariffs would actually go into effect. Duty-free goods from Canada and Mexico do not currently make good candidates for FTZ use. But as with the Section 232 and 301 tariffs, FTZs could be must-haves if those 0% duties suddenly become 25%.

Prime Minister Trudeau’s popularity has dropped significantly over the past few years, and just yesterday he announced his resignation. That further clouds the process for resolving the trade and security differences between the two countries.

The US and Canada exchange $2.7B in goods and services daily, according to Canadian government figures.

Mexico remembers that the last time Donald Trump was president, he initiated tariffs against China that proved very beneficial to Mexican industry. They are betting that if China remains the real target, companies that continue to rely on Chinese factories to make goods for the American market will need to look to Mexico for production capacity.

Investing in Mexican capacity now comes with a high-stakes question: Was the President-elect bluffing, hoping the threat would pressure the Mexican government to halt the movement of people and drugs toward the border? Or was he really preparing to put tariffs on Mexican imports to force companies to move production to the United States?

Despite the risks, businesses in Mexico are continuing with factory expansions.

“Trump hates China more than he hates Mexico,” said Isaac Presburger, whose family apparel business outside Mexico City has long exported to the United States. “This is a huge opportunity.”

Still, uncertainty abounds. Mazda is holding off on future investments in Mexico until Mr. Trump’s plans take shape. Honda has told investors that tariffs on Mexican-made vehicles could force it to consider shifting production elsewhere.

Mexico’s role as an alternative to China has in recent years propelled a construction boom.

Wisdom Digital Logistics, which operates warehouses and arranges trucking for businesses on both sides of the border, recently opened a fourth warehouse in Mexico and is already looking for a fifth.

“We’re getting calls from all over the place — the French, the Germans, the Italians,” said the company’s chief executive, Edgar Pereda. “They want to know how to guarantee their supply chains, and they’re trying to establish a presence in Mexico.”

The United States-Mexico-Canada Agreement (USMCA), is due for a formal review in 2026. Some experts see the tariff threat as a way to force the Canadian and Mexican governments to agree to an earlier renegotiation of its terms. That would create an opportunity to add rules making it harder for Chinese companies to use Mexico as an entry point to the American market.