CanaMex Tariffs: What to Expect, What to Do

Incoming US President Donald Trump recently announced plans to levy a 25% tariff on all imports from Mexico and Canada. This, in addition to an extra 10% on imports from China, could trigger a big jump in consumer prices as these three countries supply 45% of all US imports.  

Is Inflation Inevitable? 

On face value, this looks like a big supply chain problem, particularly for a few key industries, including automotive, petroleum products, electronics, and food. The US and Canada are operationally intermingled across the border, especially around the chemical and auto hubs between Detroit, Michigan and Hamilton, Ontario. Cost increases would be unavoidable, with cars from US brands like GM, Ford, and Stellantis potentially seeing an average price jump of $2,100 each. 

The same is true of Mexico’s auto, mechanical, and electronics manufacturing sectors, from Guadalajara to Monterrey. Both Mexico and Canada are also important sources of agricultural products, be they avocados or timber. Higher prices for consumers in grocery stores like Kroger, Walmart, and Whole Foods, for example, would be visible quickly.

For a country so recently traumatized by inflation, Trump’s tariff ideas might sound a bit suicidal.  

But it’s not that simple. 

Supply Chain Diplomacy and the New World of Trade 

When news of this sudden whopping tariff broke, much discussion focused on trade war and the need to plan ahead by, among other tactics, stocking up on inventory. Preparations for trade trouble have been underway for years, with supply chains regionalizing away from an overdependence on China. However, the transition from free-market global supply chains to more local-for-local sourcing networks takes time and expense, requiring investments in new suppliers, inventory buffers, and people. These higher costs are already being baked into our supply chains. 

Jumping in and out of deeply interconnected supply chain arrangements is not practical, yet political leaders can drop a potential cost bomb overnight, as Trump just did. The response from Mexican President Claudia Sheinbaum was diplomatic, but it still hinted at retaliation. Meanwhile, Canadian Prime Minister Justin Trudeau reacted by heading to Mar-a-Lago to calm nerves, with the hope of averting a mutually destructive situation. Détente is alive and well.  

Lost in the noise was news of yet another new US tariff targeting southeast Asian solar panels with duties of up to 271%. This one comes from the Biden administration. Tariffs are suddenly popping up everywhere, generally with little consideration of the complexities involved from a supply chain standpoint.  

Trump’s demands, for example, have nothing to do with jobs or economic growth and everything to do with border security. Biden’s quickie on solar panels is about energy strategy. The original CHIPS Act was all about semiconductor self-sufficiency. And let’s not forget the raft of sanctions against Russia, which effectively shut down supply chain links to the West after the Ukraine invasion. 

Your critical supply chain relationships are increasingly someone else’s diplomatic game pieces. Costs will continue to rise as political concerns overwhelm economic logic. Maybe it’s time to stop fighting the battle exclusively on economic grounds. 

Embrace Exclusions 

The regionalization of supply chains makes sense for many reasons, including localization, sustainability, and risk mitigation. Yet, in a world where costs could change by thousands of basis points overnight, this strategy offers little relief. Better, maybe, is to accept the political reality of tariffs and lean into lobbying and deal-making alongside network resilience planning. 

Research has shown that politically connected corporations receive more tariff exemptions than others (as if we needed research to prove this!) Interestingly, the details of this research confirmed that 14.6% of approximately 53,000 tariff exclusions were approved between 2018 and 2020 by the US Trade Representative. Applicants who had made donations to Republican candidates, however, were nearly four percentage points more likely to win an exclusion than those who hadn’t. 

The takeaways include a whiff of corruption but also a one-in-seven chance of getting off the hook altogether. For operations leaders looking to manage through an unpredictable trade war, maybe the best bang-for-buck lies in strategizing how to convincingly apply for special treatment.  

You’re making multi-million-dollar bets everywhere. Consider hedging them with some extra budget for lobbying, legal, and public affairs.