Depending on the season of the year, the United States’ No. 1 and No. 2 trading partners often trade places. They’re also our closest neighbors to the north and south — Canada and Mexico.
Canada is the country most often overlooked in this conversation, and Prime Minister Justin Trudeau knows it. With over a month to go before the swearing in U.S. president-elect Donald Trump, Trudeau last week made a trip to Mar-a-Lago to talk about Trump’s threat to impose 25% tariffs on Canada and Mexico.
Canada sends about 75% of its total exports to the U.S. — products like cars, dairy, paper goods and building supplies.
Trump is demanding changes to reduce the inflow of fentanyl, illegal migration and trade deficits.
After a phone call between Trump and Mexico’s new president, Claudia Sheinbaum, Trump wrote on social media that Sheinbaum had agreed to stop unauthorized migration across the border.
For her part, Sheinbaum told reporters she’s confident that a potential tariff war can be averted. She added on social media that “migrants and caravans are taken care of before they reach the border.”
While much has been said about how economists agree that tariffs generally lead to higher prices, whether those tariffs materialize is now in doubt. Both Canada and Mexico, who are also Texas’s top trading partners, appear to be making moves to head off a worst case scenario.
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Tony Payan, the director for the Center for the U.S. and Mexico at Rice University’s Baker Institute for Public Policy, said the exact content of the call between Trump and Sheinbaum remains unknown.
“Mr. Trump made a statement on his social media and then Ms. Sheinbaum made a contradictory statement in her morning press conference,” he said.
“What we do know is that she is very concerned with three things: I think potentially the issue of trade and China. China’s economic activities in Mexico are very important to the Sheinbaum administration. I think the second thing is obviously immigration. And then, of course, we are looking at the issue of fentanyl and drugs that is going to be really important to consider for the coming months.”
Payan said there are several ways the incoming Trump administration might go about measuring progress when it comes to cracking down on fentanyl production and trafficking.
“What is interesting here is that we’re going to have to see the Mexican government arrest real criminals and, of course, politicians,” he said. “Mr. Trump has already threatened that he will actually name Mexican politicians who are collaborating with organized criminals…
It’s going to be a lot about measuring how much fentanyl is making it to the U.S. streets, how much it costs, which the DEA can certainly measure, and of course, how many people get arrested in Mexico. And I think Sheinbaum has already said ‘we’ve arrested 15,000 drug traffickers and criminals in Mexico. We’ve already disbanded two major migrant caravans transiting through Mexico.’”
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The stakes could be high for both Texas and Mexico when it comes to possible tariffs, Payan said, especially when it comes to the auto industry. Sheinbaum has also hinted at retaliatory tariffs against the United States if the Trump administration levies new tariffs on Mexico.
“The amount of trade between the two countries is $800 billion a year. Half of that — $400 billion — is essentially what we could call intra firm trade,” he said. “That is, trade that occurs between manufacturing firms – the parts that come from Mexico or come from the United States into Mexico to complete the cars and to complete the goods that are traded.”
If tariffs are imposed, that will impact this supply chain and cause prices to rise for consumers in both the U.S. and Mexico.
“I don’t think Mr. Trump will make good on those tariffs. I think he will, at the end, understand how integrated these two economies really are,” Payan said.
“But he has promised that he will pursue a strategy to attract more of that manufacturing into the United States. And so some of those tariffs may actually end up happening, but that will be a 2026 issue because the USMCA, which replaced NAFTA, is supposed to be renegotiated in July of 2026. So there’ll be an opportunity for those tariffs to be negotiated at some point.”
