North American Trade Expert Says Brief Period of 25% Tariffs on Mexico a Likely Outcome

Dan Ujczo, a North American trade expert with Thompson Hine, said Wall Street was treating Trump's threat of 25% tariffs on those imports as a tactic or a threat. He said that the tone suggested "that means they’re empty threats and tactics."

Ujczo said they are tactical, but not a "truly empty threat."

The idea of hiking tariffs on Mexico and Canada over issues unrelated to trade is not like the Section 301 action, designed to restructure trade patterns between the two countries, he said. "Those are the transactional and tactical tariffs," he said, with the president's knowledge that restricting access to the U.S. market as "the largest leverage we have."

Trump linked migration and drug trafficking and tariffs on Mexican goods back in 2019, saying he'd impose 5% tariffs, and hike them by five percentage points each month until Mexico stemmed the flow of people and drugs. He never imposed the tariffs, saying he was satisfied with Mexican action to control its Southern border with Guatemala.

"Canada and Mexico are trying to figure out -- What is the president's ask? Is it going to be more than what was done in 2019? That’s the question we’re all grappling with," Ujczo said in a telephone interview.

"It’s not an empty threat. If you don’t do what he wants, you're going to get tariffs. The president knows that Canada and Mexico have a higher degree of [economic] exposure than the United States."

Ujczo, who worked in Canada early in his career, said Canadians were "losing their minds," and baffled by the demand they control illegal migration. Nearly 200,000 people were met by CBP at the Northern Border in the last fiscal year; more than 31,500 people crossed from the U.S. to Canada between ports of entry in 2023 to claim asylum. More than ten times as many migrants crossed from Mexico as from Canada in fiscal year 2024.

"A very important piece will be to get to the table, to put the facts on the table of what’s true and what’s not," he said. "Canada and the United States have done really amazing things since 9/11 in terms of sharing intelligence." He said he doesn't think Trump is aware of the scope of joint law enforcement on drugs between the two countries.

Canadian Prime Minister Justin Trudeau traveled to Florida to meet with Trump over the weekend. Mexican President Claudia Sheinbaum spoke with Trump on the phone on Nov. 27, and Trump posted on Truth Social that it was a wonderful and very productive conversation. "She has agreed to stop Migration through Mexico, and into the United States, effectively closing our Southern Border," he wrote. He added that they also talked about what can be done to stop "the massive inflow" of drugs into the U.S., and to stop illegal drug use in the U.S.

Sheinbaum, in her own tweet, said Mexico doesn't close borders, but also said, "I explained to him the comprehensive strategy that Mexico has followed to address the migration phenomenon, respecting human rights. Thanks to this, migrants and caravans are assisted before they reach the border."

After his dinner with Trudeau, Trump struck a slightly different tone, though still positive. He wrote, "I just had a very productive meeting with Prime Minister Justin Trudeau of Canada, where we discussed many important topics that will require both Countries to work together to address, like the Fentanyl and Drug Crisis that has decimated so many lives as a result of Illegal Immigration, Fair Trade Deals that do not jeopardize American Workers, and the massive Trade Deficit the U.S. has with Canada. I made it very clear that the United States will no longer sit idly by as our Citizens become victims to the scourge of this Drug Epidemic, caused mainly by the Drug Cartels, and Fentanyl pouring in from China. Too much death and hardship! Prime Minister Trudeau has made a commitment to work with us to end this terrible devastation of U.S. Families."

Ujczo said that fentanyl precursors and pill presses do come in at the Port of Vancouver and Port of Prince Rupert, but that Canada has been making investments to stop that trade. He said he wasn't surprised that Trump included Canada in his threat. "I believe that the Trump administration views North America as one entity, and they’re not going to take the time to appreciate the nuances between partners," he said.

Ujczo spoke with International Trade Today before the posts from Trump after his call and meeting, but said on Dec. 2 that those didn't change his assessment about what's likely to happen.

He said that he knows the trade deficit with Canada is about the price of oil, and how much demand the U.S. has for Canadian oil, but he tells politicians in Ottawa, "we can argue that until you’re blue in the face, Trump believes you have a trade deficit."

Because Canada has put up walls around its economy for Chinese goods, copying U.S. tariffs on electric vehicles and primary metals, and because migration and drugs are more of a problem at the Mexican border, Ujczo said he's hopeful there won't be tariffs on Canadian goods in late January, "but I don't know about Mexico."

Even if the tariffs don't come to pass, companies are already reacting, Ujczo said. There's front-loading in U.S. warehouses, and he said he expects over the next two months, companies that expected to shed warehouse leases will instead extend them.

"We are seeing small surges [of North American imports] but certainly not enough" to avoid paying tariffs, he said. There are limits on the amount of product, especially in the lean car industry, that can be produced at higher volumes with no warning. Fresh food imports, of course, cannot be stockpiled. Ujczo said it's possible that "food and crude," meaning crude oil, might not be hit with tariffs, so as to blunt the inflationary impact.

But some importers don't have the direct deposit links set up to pay CBP, because everything they import now from Mexico is duty free, and they don't have the customs bond to cover this liability (see 2411260052).

"It is a very real problem, especially for your intermittent cross-border trader," he said -- and said he was about to start a call with one such client.

He said he could see Trump issuing an executive order after he's in the White House, imposing 25% tariffs, but holding them in abeyance for a period while he waits to see if he gets the commitments he's demanding.

But, he said, even with the tone of Trump's tweet after talking to Sheinbaum, he thinks the most likely outcome is that it "may just happen for a short period of time just to prove we’re serious about it."

If those tariffs do go into effect, manufacturers would stop importing pickup trucks and cars from Canada and Mexico and tell the auto dealers to sell what they have on their lots, he said. The automakers would use the components they have in warehouses until they run out, and then "the OEMs [original equipment manufacturers] will put a significant amount of pressure down on the suppliers to eat those tariffs."

He said that the contracts require that suppliers in foreign countries absorb the tariff costs, though they're not as draconian as they once were.

"Still, the supplier’s bearing the risk in the auto industry -- it’s the nature of the beast," he said. "Suppliers understand that they will have to bear what are hopefully short-term costs."

But, given that suppliers work on thin margins, some of those suppliers would have layoffs or even shutdowns in Mexico rather than being able to pay the tariffs and ship the product.

Ujczo said that would be at the Tier 2 level, not the direct suppliers to Ford and the like, and "it would be a while before it would reach the OEMs."

But if the layoffs or shutdowns cause component shortages, then companies would reserve the supply they could get for the most profitable models, such as pickup trucks, and temporarily stop production in U.S. factories that make less profitable cars.

Ujczo said small suppliers in Ohio and Michigan would be hurt in that scenario.

If tariffs are imposed, Texas members of Congress will start pushing Trump to end the action, he predicted.

"If they tell him, 'Hey, this is good enough,' then he will react to that."

Wall Street players will lobby his Treasury and Commerce secretaries, Ujczo said, and that, too, could have influence. "I think he is concerned about markets," he said.

"If it does go into effect, there is a very short runway for resolution before we see disastrous consequences in North America," Ujczo said, particularly in the auto sector and the energy sector.

Lobbying now not to blow up the trading relationship is dicey, Ujczo believes, given that Trump has tied fentanyl and migration to the threat.

But the U.S. Chamber of Commerce is trying to thread that needle.

John Murphy, head of international issues at the Chamber of Commerce, said: “The American business community is eager to support solutions to the fentanyl crisis. We are confident that, working together with our North American partners, we can address these urgent issues without the harm to the American people that tariffs would bring.

“If imposed, tariffs themselves would not solve our border problems, and instead would send prices soaring, costing the typical American family more than $1,000, with significant harm to U.S. manufacturers, farmers, and ranchers.”

He also said Trump was "right to focus on the urgent need to secure our border... ."

But Ujczo said that if the tariffs do start being collected, U.S. firms would pressure Canada and Mexico to "give them what they want."