AS/COA Insider: Eric Farnsworth on Trump's Tariffs on Canada and Mexico

AS/COA Online: What do you think the Trump administration is trying to accomplish with these tariff policies?

Farnsworth: It appears, based on the administration's just issued 2025 trade strategy, that the administration believes it is being taken advantage of by countries that maintain trade surpluses with the United States. Through the use of tariff policy, they hope to improve the trade balance with countries such as Mexico, Canada, and China.

This is going to be a very difficult thing to do, but it also is a rethinking of what trade really is and the importance of it to the United States. It also shifts how you account for certain things. These are deficits on trade in goods. It neglects trade in services. It neglects the capital account, which is the other side of the accounting mechanism for trade. So the whole idea that we should be focusing on one specific aspect of the overall trade relationship, I think, is something that is a departure for U.S. trade policy.

AS/COA Online: What has been the reaction generally and also from Canada and Mexico?

Farnsworth: Well, the reactions are still coming in because the announcement is very recent, but we do know that Canada is moving forward with reciprocal tariffs. They announced that previously, and they're going forward with their plan. It does appear as if the tariffs will be targeted in ways that are designed to create at least some political pain in the United States, not just economic reciprocity.

Mexico has taken an interesting approach through the last month. The Mexican government has sent senior-level delegations to Washington and has attempted to negotiate. That produced some real steps on the security side in Mexico at the border in terms of fentanyl, in terms of extraditions of wanted kingpins and criminals, in terms of cooperation with U.S. security agencies.

And yet that appears not to be enough. So the question is: where do we go from here? I would anticipate that Mexico will also come forward with reciprocal tariffs. This is really a tragedy in the context of North America because the North American co-production platform is the way that all three of our economies work together to compete best with China, which is the real issue here.

AS/COA Online: What would be the impact of these tariffs on those North American economies? What are the sectors to watch here?

Farnsworth: First and foremost, it's the auto sector, which is fully integrated among the three North American economies. And some estimates would suggest that between $10,000 and $12,000 will be added to the cost of a new car once these tariffs really work through the system and the car, the finished product, gets to the end consumer. 

There are other sectors as well. Agriculture is one that isn't often thought about, but that is something that will be directly impacted. How about energy? The United States’ top foreign energy supplier is actually Canada, and Mexico is also a huge supplier. This is going to impact prices at the pump.

It’s ironic because the Trump administration came into office very specifically saying that inflation was too high and blaming the Biden administration for that. They said their top priority would be to bring inflation down. These tariffs, according to most economists, will have an inflationary impact. So these are counterintuitive ways to approach a very difficult issue and, in fact, could very much make it worse.

AS/COA Online: Can you talk a little bit about how this conversation has shifted since Trump first announced the idea during his campaign? How have Canada and Mexico prepared for these tariffs?

Farnsworth: When Donald Trump first came to national prominence in the 2016 campaign, he did so on the backs of suggesting that NAFTA, the North American Free Trade Agreement, was not just a terrible trade agreement, but was actually the cause of much of the hollowing out of the industrial economy of the United States. It was a gross overstatement, but it was something that propelled him to prominence and, some would say, caused him to gain the support of the industrial Midwest that propelled him into the presidency. He then abrogated NAFTA and replaced it with the USMCA, which he touted at the time in 2020, as the most successful trade negotiation ever.

And so I think there was a lot of thinking, particularly in Canada and Mexico, that the review of the USMCA, which is mandated for 2026, could be complicated. But at the end of the day, the president was committed to continuing with a policy that he himself negotiated.

That proved not to be the case as these threats turned not to be negotiating tactics necessarily, but a real policy departure, which would suggest that the end goal here is for the United States to cut loose our trade partners Canada and Mexico with the purpose, perhaps, of attempting to spur investors to come to the United States and invest in the United States rather than Canada and Mexico. The question is, first, will that happen? And, second, what will be the impact if it does?

The lasting impacts of this will be creating uncertainty, and questioning whether the United States is a trusted partner in upholding the rule of law, which we ourselves insisted on in the trade negotiations of USMCA. Look, trade will adjust. Supply chains will adjust, but what is going to be very difficult to win back is the trust of our top trade partners and allies, not just in North America, but worldwide.

AS/COA Online: What are you watching for now?

Farnsworth: What we need to watch for is a de-escalation, an off-ramp. The three parties, who are now fully engaged, need to find a way to move out of this morass and say this relationship is too important.

But what we also need to hear from the United States is: what is enough? In other words, Canada and Mexico can’t meet a demand to do better to anybody's satisfaction because they don't know what they're actually trying to do.

Border security, fentanyl, investment: all these are very important issues. But the question is how do we work together to address these issues? And I don't personally believe that you can actually address them effectively unless we work together.