Huge Tariff Increases Could Hit Mexico, Canada, Despite USMCA Exemption

Mexico and Canada are the two largest importers into the United States this year, accounting for almost 26% of the value of all imports but, as importantly, the top-ranked position in more than 70% of the categories. That means the effects of the import tariffs would be widely felt.

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Note: President Trump announced shortly after this article was completed that he had backed off his 30% tariffs on imports from Mexico that were due to go into effect Friday and offered a 90-day pause. It is unclear if the 35% tariffs on imports from Canada are still to go into effect.

President Trump’s promise to impose 30% tariffs on imports from Mexico and 35% tariffs on imports from Canada beginning tomorrow (Aug. 1) could hammer up to three-fourths of all imports from the United States’ two largest trade partners.

The potential for big hits to the automotive and fruit and vegetable industries is real.

It is also possible that one or both countries could retaliate, hurting U.S. exporters. The two account for more than 30% of U.S. exports.

But, it’s more than that. As I wrote in an earlier post, I looked at which country ranked first for all export categories and found that either Mexico or Canada ranked first 72% of the time. The reach of any retaliation could be widely felt.While Trump has exempted USMCA-compliant imports and some other categories from his threatened tariffs, less than 25% of all imports from Mexico and less than 20% from Canada are compliant this year, according to my analysis of the latest U.S. Census Bureau data through May.

The 2025 percentages are sharp drops from 2024, when Mexico was at 48.9% compliant and Canada at 37.9%. The decline is likely due to increased Customs and Border Protection scrutiny – or fear of it.

A quick word of caution. It’s not clear these tariffs will go into effect, at least not tomorrow, at least not at the elevated rates.

Ever since Trump announced his “Liberation Day” tariffs on April 2, there have been retreats, pauses, escalations, more pauses, announcements of deals that wilted under scrutiny and conflicting accounts. There’s a good chance you know this.

That is compounded by tariffs that are country-based and those that are sector-based, tariffs that initially were said to be added one atop another and then not.

Nearly four months later, there are no completed agreements, despite an initial promise of 90 in 90 days – once the first pause was quickly announced. But the United States has collected record tariffs. Even if, like me, you have trouble keeping track of it all, you probably are aware of this as well.

And it all could change, or be kicked down the road, in an instant. You know that also.

But, back to the case of the two countries that are not only the two largest U.S. trade partners but are the two largest import partners, at about 26% of the total.

You might have thought that those 2024 percentages I mentioned – Mexico at 48.9% compliant and Canada at 37.9% – seemed low, given that USMCA and its predecessor, NAFTA, offered duty-free entry for so many goods. While the 2024 percentages are slightly lower than historical norms, they are not significantly so.

For most of the last two decades, the percentage of imports from Mexico that the U.S. Census Bureau showed in the category for duty-free entry was between 50% and 55%.

With Canada, the range for the last two decades has been a little greater. Prior to 2017, its imports were eligible to enter duty free sometimes slightly more than 50% of the time and sometimes slightly less. It first dipped below 40% in 2018 and has stayed there – until this year, when it dropped not only below 30% but also 20%, to 19.7%.

The reason for the lack of compliance is that importers have felt the additional paperwork required to get to a zero tariff was not worth it.

Many imports already qualified for a 2.5% tariff or something similar with almost no paperwork under “Most Favored Nation” status. Lowering tariffs globally had been a peacekeeping goal since World War II in large part under the guidance of what became the World Trade Organization. And while there is a hodgepodge of tariff rates, from electronics to apparel and everything in between, that effort has largely been a success.

Now, though, the WTO has been defanged because neither Trump nor his predecessor (and successor) President Joe Biden filled vacancies that left the appellate level without a quorum required to settle disputes.

Nevertheless, the drop in Mexico from 48.9% to 22.6% and Canada from 37.9% to 19.1% will affect a host of important sectors hard, should the high tariffs go into effect as promised on Friday.

That includes the massive and highly integrated automotive sector and Mexico’s critical produce sector, among others.

For example, cars and other passenger vehicles from Mexico have been 55.9% compliant this year, well above the average, but in 2024 82.5% of all passenger vehicles were in the category that includes USMCA. If the decline is related to increased efforts by CBP, that would suggest more parts from China and other nations.

In the primary motor vehicle parts category, compliance dropped from just under two-thirds, 65.5%, to 25%. It is the third most valuable U.S. import from Mexico. This would suggest the same issue as mentioned with passenger vehicles.

Compliance for the tractors that pull trailers – forming so-called tractor-trailer rigs or, more colloquially, 18-wheelers – has declined from 97.3% to 60.5%.

Even those prized Mexican avocados, which were 100% compliant in 2024, have fallen. So far this year, the percentage of avocados in the category that includes USMCA compliance is 56.5%. I cannot imagine why there would be such a drop – no foreign parts in an avocado – other than because of the CBP efforts, the importers chose to pay a smaller tariff rather than deal with additional “red tape.”

Just under two-thirds of berries from Mexico were in the Census Bureau category of USMCA compliance in 2024. That percentage has slipped to a third this year.

One import where compliance has fallen for imports from both USMCA partners is tires, from 99.6% to 43.8% in Mexico and 98.7% to 39.1% in Canada. This could easily be a transshipment issue at play, I would guess.

Another is passenger vehicles, the second most valuable import from Canada after oil. This category has slipped from 97.6% compliant to 72.7%.

As with Mexico, compliance for motor vehicle parts from Canada has also fallen, from 77.7% to 27.3%.

The list goes on and on. All that remains for now is what impact such extraordinary tariffs on the nation’s first- and second-ranked trade partners would have on the flow of goods across the northern and southern U.S. borders.