Perryman: Tariff Turbulence

President-elect Trump has announced that he is planning to implement a 25% tariff on all goods imported to the US from Canada and Mexico. The stated goals are to reduce the flow of fentanyl and other drugs into the United States and to increase assistance with controlling illegal immigration. While these issues are certainly important, the economic costs of such tariffs would be enormous. 

Mexico and Canada are among the most important US trading partners, ranking second and third behind China. In 2023, imports from Mexico were $475.2 billion, with another $418.6 billion imported from Canada. Top imports from Mexico include vehicles, electric machinery, nuclear reactors and parts, and fuels. From Canada, top products are fuels, vehicles, and nuclear reactors and parts. These products are integral to the US manufacturing supply chain as well as important to consumers. The free flow of trade is beneficial to all three nations, encouraging economic growth and benefiting consumers. 

If substantial tariffs are imposed and maintained, they would raise prices and lead to dynamic effects across the economy. My firm recently estimated the overall economic cost of these potential tariffs, accounting for changes in purchasing patterns and other responses. (See our website for a brief including additional detail.) 

We estimate that the total net cost to the US economy of a sustained 25% tariff on imports from Mexico would include $145.4 billion in annual gross domestic product (GDP) and more than 1.1 million jobs, while a similar levy on imports from Canada yields projected losses of $105.2 billion in yearly GDP and approximately 826,000 jobs. The effects in Texas alone would include yearly losses in gross state product of about $46.9 billion and a decline of 370,000 jobs. In addition to the massive impacts on numerous US manufacturing sectors such as electronic equipment and vehicles, consumer-related effects would bring substantial losses of retail sales. 

The aggregate impact of tariffs on both countries is $250.6 billion in annual GDP decline and the loss of almost 2.0 million jobs. The overall cost to the US economy in such a scenario represents approximately 0.91% of GDP, 0.95% of earned income, and 1.27% of employment. 

Tariffs would also increase inflation (more than a percentage point in our analysis) as costs are passed to consumers. Beyond the negative effects on people and businesses, increased price pressures could lead to tightening by the Federal Reserve. Another consideration is the likelihood that Canada and Mexico would implement retaliatory tariffs, negatively affecting US manufacturers. 

Clearly, levying substantial tariffs on our neighbors is highly detrimental economically and, consequently, they are unlikely to be sustained. Agreements on key issues must be reached without resorting to such destructive measures. Stay safe! 

Editor’s Note: The above guest column was penned by Dr. M. Ray Perryman, president and chief executive officer of The Perryman Group (www.perrymangroup.com). The Perryman Group has served the needs of over 3,000 clients over the past four decades. The above column appears in The Rio Grande Guardian International News Service with the permission of the author. Perryman can be reached by email via: shelia@perrymangroup.com.

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