Trump's threat to impose tariffs could be costly for US consumers

If President-elect Donald Trump carries out his threat to impose 25% tariffs on everything imported from Mexico and Canada, the price increases that could follow will collide with his campaign promise to give American families a break from inflation, economists are warning.

Companies would have little choice but to pass along the added costs, dramatically raising prices for food, clothing, cars, alcohol and other goods, they said.

Longer term, said Mary Lovely, a senior fellow at the Peterson Institute for International Economics, the threat of tariffs could make the US an "unstable partner" in international trade. "It is an incentive to move activity outside the United States to avoid all this uncertainty," she said.

Tariffs could also hit food prices

The President-elect floated the tariff idea, including additional 10% taxes on goods from China, as a way to force the countries to halt the flow of illegal immigrants and drugs into the US. But his posts on Monday on Truth Social [the Trump-owned social media site] threatening the tariffs on his first day in office could just be a negotiating ploy to get the countries to change behaviour.

High food prices were a major issue in voters picking Trump over Vice President Kamala Harris, but tariffs almost certainly would push those costs up even further.

Washington trade group, the Produce Distributors Association, said tariffs would raise prices for fresh fruit and vegetables and hurt US farmers when other countries retaliate.

"Tariffs distort the marketplace and will raise prices along the supply chain, resulting in the consumer paying more at the checkout line," said Alan Siger, association president.

Mexico and Canada are two of the biggest exporters of fresh fruit and vegetables to the US.

Car companies see shares take a big hit

The US is the largest importer of goods in the world, with Mexico, China and Canada its top three suppliers, according to the most recent US Census data.

People looking to buy a new vehicle arelikely to see big price increases as well, at a time when costs have risen so much that many cannot afford to buy one. The average price of a new vehicle is around $48,000 (€46,000).

About 15% of the 15.6 million new vehicles sold in the US last year came from Mexico, while 8% crossed the border from Canada, according to Global Data.

Much of the tariffs would get passed along to consumers, unless car makers can somehow quickly find productivity improvements to offset them, said CJ Finn, US automotive sector leader for PwC. That means even more consumers "would potentially get priced out."

Production also likely to be affected

Hardest hit would be Volkswagen, Stellantis, General Motors and Ford, Bernstein analyst Daniel Roeska wrote in a note to investors on Tuesday. "A 25% tariff on Mexico and Canada would severely cripple the US auto industry," he said.

The tariffs would hurt US industrial production so much that "we expect this is unlikely to happen in practice", Roeska said.

The tariff threat hit car stocks on Tuesday, particularly shares of GM, which imports about 30% of the vehicles it sells in the US from Canada and Mexico, and Stellantis, which imports about 40% from the two countries.

For both, about 55% of their lucrative pickup trucks come from Mexico and Canada. GM stock lost almost 9% of its value, while Stellantis dropped nearly 6%.

It's not clear how long the tariffs would last if implemented, but they could force car making executives to move production to the US, which could create more jobs in the long run.

However, Morningstar analyst David Whiston said car makers probably won't make any immediate moves because they can't quickly change where they build vehicles.

Trade treaty heading towards review date

Trump has sound legal justification to impose tariffs, even though they conflict with a 2020 trade deal brokered in large part by Trump with Canada and Mexico, said William Reinsch, senior adviser at the Center for Strategic and International Studies and a former Clinton administration trade official.

The treaty, known as the USMCA, is up for review in 2026.

In China's case, Reinsch said, Trump could simply declare Beijing hasn't met obligations under an agreement he negotiated in his first term. For Canada and Mexico, he could say the influx of migrants and drugs are a national security threat, and turn to a section of trade law he used in his first term to slap tariffs on steel and aluminum.

The law he would most likely use for Canada and Mexico has a legal process that often takes up to nine months, giving Trump time to seek a deal.

If talks failed and the duties were imposed, all three countries would be likely retaliate with tariffs on US exports, said Reinsch, who believes Trump's tariffs threat is a negotiating ploy.

US companies would lobby intensively against tariffs, and would seek to have products exempted. Some of the biggest exporters from Mexico are US firms that make parts there, Reinsch said.

Longer term, Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said the threat of tariffs could make the US an "unstable partner" in international trade. "It is an incentive to move activity outside the United States to avoid all this uncertainty," she said.