Emergency substack: The Mexico-Canada tariffs are still on!
We have never been free-trading
NAFTA was a complex animal. It had rules of origin for steel and automobiles—unless enough value was added in North America, shipments were taxed when they crossed a border. It also excluded products, like anything from Canada made from milk, peanuts, cotton, or sugar. And any agricultural imports over a quota were taxed. Same for textiles.
The USMCA — known as “T-Mec” in Mexico, which sounds a bit like the machines Skynet will use to kill us all — was an even more complex animal. Boiled down, however, it raised “rules of origin” over the NAFTA agreement it replaced. And it added further complexity to the automotive trade by insisting that a certain proportion of car parts be made in factories paying more than $16 per hour.
The end result was that under both agreements the share of duty-paying goods was too damn high:
A majority of imports from both Mexico and Canada paid tariffs even before President Trump! If you want the headline figure from January 2025, it would be 54% of imports from Mexico and a whopping 66% of imports from Canada. With numbers like that, I had to resist the temptation to make the main title this post be, “We Have Never Been Free-Trading.”
That said, up until now tariffs have been pretty low on the stuff exempt from free trade. So exporters sucked it up. In fact, tariffs were so low that when the USMCA’s new rules required more North American content for cars and mandated that workers be paid a reasonable wage, more auto manufacturers started saying “screw it” and just paid the tariffs rather than comply.
That reaction made sense! You could either start paying workers $16 an hour or just pay the almost risible 2.5% rate the U.S. charged non-NAFTA auto imports. It makes sense that the share of tariff-paying finished cars coming from Mexico (mostly) would jump from basically nothing in ‘18 to more than eight percent in ‘23. Interestingly, the two biggest categories of car parts for which the car companies said “screw it, we’d rather pay lower wages than lower tariffs” were engines and steering wheels. The latter is unsurprising. The former is a bit more so. (Table 1.) But I digress.
When President Trump lifted the tariffs on our NAFTA partners, he only did so for duty-free imports under the USMCA. The tariffs are still on for most imports from both countries.
Now, to be fair, this isn’t crazy as a long-term policy. If the point of the USMCA was to increase the North American content of manufactured goods and raise wages in Mexico, then the penalty for failure should be pretty high. Of course, the implication of that idea is that Canada and Mexico should apply reciprocal policies and do the same thing to duty-paying U.S. exports. (Better to just have a North American customs union with a high external tariff and be done with it, but nobody besides me seems to be talking about that idea.)
The problem, of course, is that nobody knows if this is a long-term policy!
And nobody knows how Canada and Mexico will react. Canada seems to be raring for a full-scale trade war. That seems more because the United States is acting like it wants to annex the place rather than because of the tariffs themselves. (Is anyone interested in what an annexation — that won’t happen! — would look like if it did?) Mexico, on the other hand, is playing it cool. I mean, President Sheinbaum is going to hold a party in the Zócalo to celebrate the lifting of tariffs on (shhhhh! only half of) Mexico’s exports, whereas Prime Minister Trudeau is, well, keeping tariffs on $21 billion of U.S. exports, revealing how bad it has been talking to “Donald,” and otherwise fighting back.
Let’s not mention Ontario’s Premier Ford, threatening to turn off America’s lights.
I can’t tell you which strategy will pay off better. (I suspect Mexico. Sheinbaum pleasantly surprised me in November, when I wrote, “The recent phone call between the presidents provides grounds for optimism” and she continues to do so.) Failure will mean an expansion of the tariffs to cover the one-third of Canadian goods that they haven’t yet hit.
But I can say that the tariffs are happening right now. In a less damaging way, and one industry and more easily adjust to, but they are still happening.