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North American supply chains will be subject to significant disruption should the tariffs go ahead, hurting the Canadian and Mexican economies and adding to price pressures in the US.

The tariffs are likely to be particularly disruptive for the North American automotive sector, which accounts for 22% of all trade under the United States-Mexico-Canada Agreement (USMCA). Mr Trump’s executive orders are likely to throw the industry’s interconnected supply chains into disarray.

Mexico and Canada together export about US$170bn in motor vehicles and parts to the US, accounting for more than 50% of the country’s imports of these goods. Imposing the threatened tariffs would therefore increase the costs of all vehicles assembled in the USMCA region, leading to higher sticker prices and dampening new-vehicle sales.

US tariffs will also affect the targeted economies directly by raising the costs of more general exports, besides second-order effects on manufacturing investment and domestic consumer sentiment.

The economic impact on China in particular will be profound, and will not be offset by policy response from the Chinese government. 

In determining the effects on trade volumes, it is important to determine the extent to which US imports from China might respond to tariff rate changes. Trade is initially inelastic, as importers struggle to find substitutes, but elasticity increases over time.

Depending on the details of the US tariff policy, we could expect direct US imports from China to decline by between 20 and 40 percentage points within one year after tariffs are raised, reducing total Chinese exports by 3% to 6% within three years, assuming a higher substitution effect from the second year.

The aggregate shock to China’s real GDP growth over 2025-27 would be 0.6 to 2.5 percentage points, with two thirds of that arising from the trade shock, and one third from second-order impacts on investment and consumption.

This means that China’s GDP growth would slow to between 3.6% to 4.1% by 2027, down from 5.0% in 2024.

The renminbi would also come under significant depreciatory pressures. However, we do not expect China to depreciate its currency aggressively to boost exports, but instead to pursue a managed devaluation.

Expect more supply chain shifts as multinational companies in particular seek to move value-add manufacturing processes from China to ‘friendly’ third countries to avoid US tariffs. The biggest beneficiaries from the tariff hikes imposed during Mr Trump’s first term in office were Vietnam, Taiwan, Canada, Mexico and India.

Now Canada and Mexico have come into scope for steep tariffs, countries such as like Poland, Indonesia and even Morocco may be able to build further on their own recent successes in attracting foreign direct investment and increasing export volumes.

Robert Willock is the Global Editorial Director of the Economist Intelligence Unit's Corporate Network.

The EIU has one of the largest and most experienced analyst teams in the world, with over 190 full-time country experts, industry analysts and economists.

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For more guidance from the Economist Intelligence Unit on the impact of tariffs on global and regional trade, email: [email protected]