Mexico, Canada Tariff Threats Signal Shift Toward Geoeconomics and Executive Power
Trump demonstrated that he will use tariffs as a key geoeconomic tool and will use executive actions and a broad interpretation of executive authority to achieve his policy aims.
Key points
Trump threatened tariffs on products from Mexico and Canada, prompting those countries to take actions to reduce illegal migration and the flow of fentanyl into the United States.
Trump previewed this action in an announcement shortly after the election and in his trade policy memorandum issued on his first day in office.
The tariffs episode indicates three developments for U.S. geoeconomic policy: (1) Trump will use tariffs to address national security issues; (2) he has largely disregarded the United States-Mexico-Canada Agreement (USMCA); and (3) he will use executive actions and a broad interpretation of executive authority to achieve his policy aims.
Summary
On February 1, 2025, President Donald Trump ordered tariffs on products from Mexico and Canada to induce those countries into taking action to reduce illegal migration and the flow of fentanyl into the United States. Mexico and Canada quickly struck individual border-security agreements with the United States, and the Trump administration agreed to delay the implementation of the tariffs by at least 30 days beyond the February 4, 2025 effective date. The delay will provide time for further negotiations.
For the North American trading partners, the order would have imposed additional tariffs of 25% on imports from Mexico, 25% on imports from Canada, and 10% on energy imports from Canada. It would also have suspended the $800 “de minimis” exemption for small packages from these countries. In addition to putting these measures on hold, the border-security agreements mooted threatened retaliatory measures from Canada and Mexico and helped to avoid a trade war between the United States and its largest trading partners.
In negotiation a delay in the tariffs, Mexico agreed to send 10,000 National Guard troops to the border to address fentanyl trafficking, and the United States agreed to increase efforts to stop the flow of weapons into Mexico. Canada also agreed to assign 10,000 personnel for border security, implement its $1.3 billion border security plan to stop the flow of fentanyl, and appoint a Fentanyl Czar, among other commitments.
Background: Following Through on Promises
Trump’s tariff threat should not have come as a surprise. In November, after the election, Trump wrote: “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders. This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country. Both Mexico and Canada have the absolute right and power to easily solve this long simmering problem.”
Additionally, Trump’s trade policy memorandum, issued on his first day in office, directed government agencies to “assess the unlawful migration and fentanyl flows from Canada, Mexico, the PRC, and any other relevant jurisdictions and recommend appropriate trade and national security measures to resolve that emergency.” See (Trump Outlines “America First Trade Policy".)
Policy Implications: Using Tariffs for National Security Purposes
In his executive orders, Trump invoked emergency economic authority under the International Emergency Economic Powers Act (IEEPA) and justified the tariffs as critical to national security. The threatened North American tariffs, along with the tariffs on China, indicate three significant developments for U.S. geoeconomic policy that businesses should understand: (1) Trump has discarded the long-term U.S. policy of trade liberalization and will use tariffs and other trade restrictions as key geoeconomic tools to address non-trade issues such as military and security matters; (2) he has largely disregarded the United States-Mexico-Canada Agreement (USMCA) as a North American economic counterweight to China; and (3), more generally, he will use executive actions and a broad interpretation of executive authority to achieve his policy aims.
Trump will use tariffs as a geoeconomic tool: Trump has demonstrated that he will use tariffs as leverage to pressure countries over non-trade policy, including to address U.S. domestic issues. “Tariffs are very powerful, both economically and in getting everything else you want,” Trump said while signing the executive orders. Trump’s success in using tariffs as leverage over Mexico and Canada also means that he is likely to use them against other trade partners, including the EU, to force negotiations over a range of U.S. policy aims. In breaking away from the U.S. policy that limited the use of tariffs to trade policy matters, Trump has embraced geoeconomics. This could lead to repeated disruptions of the international trading system.
Trump has disregarded the USMCA as a counterweight to China: Trump’s actions demonstrated that he is willing to disregard trade agreements to pursue his policy goals. More specifically, he has disregarded the USMCA, which his administration negotiated during his first term to replace the North American Free Trade Agreement (NAFTA). North American economic integration established supply chains that give U.S. companies access to resources from Canada and low-cost labor from Mexico. The economic block, and particularly the USMCA, has long been viewed as a counter to China amid U.S.-China trade tensions.
Trump will use broad executive power to achieve his policy aims: Trump’s unprecedented use of the IEEPA as authority to order these tariffs indicates that he is likely to rely on executive actions and a broad interpretation of executive authority to achieve his policy aims. Presidents have historically used the IEEPA to impose economic sanctions. There is uncertainty as to whether the IEEPA authorizes the president to implement tariffs in response to national security threats, as Congress has the constitutional authority to regulate international trade. Nonetheless, courts are often reluctant to oppose a president on national security matters. Additionally, with the likely use of quick executive actions in economic policy, businesses will be unable to rely on public warnings on long-term investigation to prepare for major policy changes.
What Should Companies Do?
Although the tariffs on Mexico and Canada are delayed, companies should not assume that tariffs and trade restrictions are only a negotiating tool. Given the use of tariffs in his first term, Trump has shown that he is willing to allow them to take effect if negotiations fail. With this in mind, companies should identify any products covered by the potential U.S. tariffs on Mexico and Canada or the potential retaliatory tariffs from those countries. If negotiations break down and the tariffs are implemented, the products covered under these actions will likely stay the same as those already announced.
Given the volatility of these tariff actions, companies should actively monitor the ongoing negotiations and political developments to stay alert to the possibility that the North American tariffs will take effect as well the possibility of any trade countermeasures or other changes in trade policy.
Additional Details
Products covered: The executive orders covered “all articles” that are products of the effected countries and did not cite a list of products with Harmonized Tariff Schedule of the United States (HTSUS) codes. A list of products from Mexico and Canada would be expected if those tariffs are implemented. For a definition of energy imports from Canada, the order cites Trump’s earlier executive order on a “National Energy Emergency.” That order defines “energy” or “energy resources” as “crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and critical minerals.”
Additional changes: Trump’s executive order also disallows duty drawbacks in which importers are refunded tariffs and other fees on the imports of certain goods that are then exported from the United States. Products imported into a U.S. foreign trade zone (FTZ) under “domestic status” continue to be duty free, while other products must be admitted as “privileged foreign status” and subject to these tariffs on exit from the FTZ. It is unclear whether there would be exemptions or exclusions from the tariffs.
Potential retaliation: Mexican President Claudia Sheinbaum said Mexico would retaliate but gave no further details. Meanwhile, Canada ordered tariffs of 25% on approximately $155 billion CAD in U.S. imports in two stages. The first phase would have imposed tariffs on $30 billion (CAD) in U.S. goods, including orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and pulp and paper. The second phase, which Canada originally scheduled for 21 days after the first stage, would have imposed tariffs on $125 billion (CAD) in U.S. goods, including passenger vehicles and trucks, electric vehicles, steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles, and recreational boats.