President-elect Donald Trump's aggressive tariff proposal—25% on imports from Canada and Mexico—could wreak havoc on North America's economies. Goldman Sachs predicts losses for Canada and Mexico, surging consumer prices, and a slowdown in U.S. growth.
In a note shared on Monday, Goldman Sachs economists, including Joseph Briggs, estimate that Canada and Mexico could see their gross domestic product shrink by as much as 4% under Trump's full 25% tariff proposal, while U.S. GDP could contract by 0.4%
“A large increase in tariffs on North American imports would entail significant economic costs, particularly for Canada and Mexico,” the economists said.
Canada And Mexico Face The Hardest Hit
The economic fallout of Trump's proposal could be catastrophic for America's closest trading partners.
Goldman Sachs estimates that every 10-percentage-point increase in tariffs between the U.S. and its North American neighbors would cut GDP by roughly 1.5% in Canada and 2% in Mexico. Under the full 25% tariff scenario, the damage would grow to over 2.5% for Canada and 3.5% for Mexico.
The economists also warned of inflationary risks: A 25% tariff hike could raise consumer prices in Canada and Mexico by more than 2%.
This comes as both nations are already grappling with high inflation, leaving central banks with fewer tools to soften the blow.
Ripple Effects On The US Economy
The tariffs aren't painless for the U.S. either. Goldman's “tariff rules of thumb” suggest that every 1 percentage point increase in the effective U.S. tariff rate raises core personal consumption expenditures prices—the Fed’s favorite inflation gauge—by 0.1% and shaves 0.05% off GDP.
Trump's North American tariff plan would increase the U.S. tariff rate by 7.3 percentage points, translating to a 0.7% bump in core PCE prices and a 0.4% GDP decline.
Trade policy uncertainty is already weighing on U.S. businesses.
“Anecdotal reports suggest that the threat of U.S. tariffs is already leading companies to reevaluate expansion plans in Mexico and Canada,” said the economists. Delayed investment and supply chain disruptions could exacerbate the economic drag.
The U.S. auto industry is particularly exposed to the risk of higher tariffs on Mexico and Canada. Shares of General Motors Company (NYSE:GM) have fallen by 9% since Trump’s announcement to raise tariffs on both countries.
Read Also: GM, Other US Automakers Face Sharp Profit Squeeze From Trump Tariffs, Analysts Warn
From Trade Boost to Trade Bust?
Free trade agreements like NAFTA and the USMCA have historically boosted North American economies. Goldman estimates these agreements raised GDP by 1.5% in Canada, 2.6% in Mexico, and 0.5% in the U.S. Reversing those gains with aggressive tariffs would erase decades of progress and impose lasting damage.
“These estimates serve as a reminder of the sizable economic and market risks associated with Trump's trade proposals,” the investment bank wrote.
Currency markets are already bracing for turbulence. Goldman's FX team believes the tariff threats will force markets to “embed a more lasting, and broader, tariff premium,” potentially weakening the Canadian dollar and Mexican peso against the U.S. dollar.
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