Steep U.S. tariffs on imports from Canada and Mexico would lead to higher costs across the continent – even if those countries did not retaliate with duties of their own, Royal Bank of Canada economists said in a report.
North American supply chains have become tightly integrated over decades, and a sizable chunk of the U.S.’s manufacturing imports from Canada and Mexico have components that were initially made in the U.S. and exported at earlier stages in the production process. In a notable example, some vehicle parts cross borders multiple times on their path to completion.
“U.S. producers and consumers initially and directly pay U.S. import tariffs,” RBC chief economist Frances Donald and assistant chief economist Nathan Janzen explained in the report. “But, since trade flows between Canada and the U.S. (and Mexico and the U.S.) are so integrated, raising tariffs on U.S. industrial imports would also raise costs for U.S. exporters, and in turn, feed through to higher Canadian import costs.”
U.S. President Donald Trump has repeatedly said that Canada and Mexico could get hit with 25-per-cent tariffs. While Mr. Trump has tied these potential duties to border-control issues, he also rails against the trade deficits that the U.S. has with several countries, including Canada.
Ultimately, prohibitive tariffs in North America could undermine the continent as a manufacturing hub, the RBC economists said.
“Since trade between the U.S. and Canada (and Mexico) is so tightly integrated, tariff hikes potentially have more impact raising costs (and reducing competitiveness) of the North American industrial sector than offshore production chains in Asia and Europe.”
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