Historically, tariffs have primarily served two purposes, which were to raise revenue for the government and to protect domestic industries from foreign competition. President Trump has a decidedly different view of tariffs, as he considers them a bargaining chip in political disputes. In the early days of his second administration, this has become clearer than ever, as Trump is once again using tariffs to wield economic power in pursuit of his political goals.
When he announced the implementation of a 25-percent tariff on all imports from Canada and Mexico and a 10-percent additional tariff on China on February 1, it wasn’t to raise government revenue or protect U.S. industries, but to stop what he describes as “the flood of illegal aliens and drugs” from pouring into the United States. During his campaign, Trump has repeatedly blamed Mexico, Canada and China for their respective roles in the illicit fentanyl trade and the latest tariffs are his way of forcing them into action.
So exactly how much leverage does the U.S. have in potential trade wars with Canada, Mexico and China? First of all, it’s important to remember that these are America’s most important trade partners, accounting for 43 percent of U.S. goods imports and 41 percent of U.S. exports in 2023, meaning that U.S. tariffs on goods from these countries or reciprocal tariffs have the potential to hurt U.S. business and consumers alike. The U.S. is, however, less reliant on trade than other countries, including China and especially Canada and Mexico. According to the World Bank, U.S. trade, i.e. imports and exports of goods and services, was equivalent to 25 percent of U.S. GDP in 2023. For China, the trade-to-GDP-ratio was 37 percent, while it was much higher at 67 and 73 percent for Canada and Mexico, respectively.
As our chart shows, the latter two are extremely vulnerable to U.S. tariffs, as their powerful neighbor accounted for roughly 80 percent of both Mexican and Canadian exports in 2023. This gives the Trump administration significant leverage in future negotiations, as high tariffs could prove catastrophic to Canadian and Mexican businesses catering to the U.S. market. The same cannot be said for China, which isn’t as dependent on the U.S. as a target market for its goods. In 2023, the U.S. accounted for just 15 percent of Chinese exports, leaving Trump with a tougher position to negotiate from.
