The potential rollback of tariffs on Mexico and Canada by President Donald Trump, could have significant implications for the U.S. economy. While no full rollback has been officially confirmed beyond specific exemptions (e.g., for automakers), analyzing the economic impact involves considering the effects of the existing tariffs and how reversing them might alter the current trajectory.
Current Impact of Tariffs on the U.S. Economy
The 25% tariffs on most imports from Mexico and Canada, implemented on March 4, 2025, along with a 10% tariff on Canadian energy exports, have already begun to influence the U.S. economy. These tariffs were introduced to address illegal immigration and fentanyl trafficking but have broader economic consequences:
Increased Consumer Prices: Tariffs are taxes on imports paid by U.S. businesses, often passed on to consumers. Economists estimate that the tariffs could raise prices significantly for goods like automobiles (e.g., an additional $3,000 per vehicle due to integrated North American supply chains), fresh produce (Mexico supplies over 60% of U.S. imports), and energy products (especially in the Midwest, reliant on Canadian oil).
The Urban-Brookings Tax Policy Center projected an annual cost of $930 per U.S. household in 2026, though some analyses suggest higher figures (up to $7,600 per household per the National Retail Federation) depending on the scope and duration.
Economic Growth Reduction: The Tax Foundation estimates that the tariffs on Canada and Mexico, if sustained without retaliation, would reduce U.S. long-run GDP by 0.2%, equating to a loss of approximately 223,000 full-time equivalent jobs and a 0.6% drop in after-tax incomes. With retaliation (as both countries have imposed 25% tariffs on U.S. exports), the Brookings Institution suggests a GDP hit of 0.25% even without escalation, while Piper Sandler forecasts a drop from 2% to 1% in 2025 GDP growth. Retaliation amplifies this, potentially costing over 400,000 U.S. jobs, per Mexican government estimates.
Market Volatility: The tariffs triggered immediate market reactions, with the S&P 500 dropping 1.8% on March 4 and continuing to slide (1.7% on March 5), reflecting investor concerns over trade war risks and inflation. This volatility could dampen business investment and consumer confidence.
Supply Chain Disruptions: Industries like automotive, agriculture, and construction, heavily reliant on cross-border supply chains, face higher costs and potential production slowdowns. For example, 50% of North American trade involves supply chain intermediates (e.g., a Chevy Silverado’s parts crossing borders multiple times), magnifying the tariff’s impact.
Inflationary Pressure: The tariffs contribute to a one-time price level increase, with potential for sustained inflation if expectations shift. The Bank of Canada notes that central banks may struggle to balance growth slowdowns (requiring looser policy) with price hikes (requiring tighter policy), risking stagflation—a mix of stagnant growth and rising prices.
If Trump were to rollback these tariffs, either partially (beyond the current auto exemption) or fully, the U.S. economy could see several shifts. Reducing or eliminating the 25% tariffs would lower import costs, potentially easing price pressures on consumer goods like cars, food, and energy. This could save households hundreds to thousands of dollars annually, reversing some of the projected $930–$7,600 cost increases.
Gasoline prices, particularly in the Midwest (reliant on Canadian crude), could stabilize or drop by 10–20 cents per gallon, per Cato Institute estimates for the 10% energy tariff’s impact. A rollback could mitigate the 0.2%–0.25% GDP reduction, preserving or restoring some of the 223,000–400,000 jobs at risk. The Global Trade Analysis Project (GTAP) model suggests that without tariffs, U.S. economic growth could rebound closer to pre-tariff projections (e.g., Piper Sandler’s 2% for 2025), especially if retaliation from Canada and Mexico is also scaled back.
A rollback signal could calm financial markets, reversing recent declines and boosting investor confidence. This might encourage business investment, which has been hampered by uncertainty and higher costs, particularly in tariff-sensitive sectors like manufacturing. Easing tariffs would restore efficiency to North American supply chains, reducing costs for industries like automakers (who received a one-month exemption on March 5) and agriculture. This could prevent long-term shifts away from U.S.-centric production, preserving the benefits of the USMCA framework.
Removing tariffs would reduce the immediate inflationary impulse, potentially averting stagflation risks. However, the one-time price hikes already in motion might not fully reverse, depending on how businesses adjust pricing and profit margins. The current auto exemption (for GM, Ford, and Stellantis) suggests a targeted approach rather than a blanket reversal. A full rollback would have broader positive effects, but partial measures might limit relief to specific sectors, leaving others exposed.
Retaliation Dynamics: Canada and Mexico’s retaliatory tariffs (e.g., Canada’s $107 billion levy on U.S. goods, Mexico’s planned measures) would need to be unwound in tandem for maximum benefit. Failure to coordinate could sustain some economic drag. The longer tariffs remain, the deeper the economic entrenchment (e.g., supply chain rerouting, price adjustments). A swift rollback would minimize damage, while delays could lock in costs.
Trump’s tariff rationale (border security, fentanyl) might shift to alternative measures, affecting the political and economic calculus. Commerce Secretary Lutnick’s hints at compromises (e.g., sector-specific relief) suggest flexibility, but no firm commitment exists as of March 6.
A rollback of tariffs on Mexico and Canada would likely benefit the U.S. economy by reducing consumer prices, supporting GDP growth, stabilizing markets, and easing supply chain strains. It could reverse much of the estimated 0.2%–1% GDP loss, save jobs, and curb inflation risks, particularly if paired with de-escalation from trading partners.
However, the extent of relief depends on the rollback’s scope, timing, and reciprocity. Without a full rollback, the U.S. economy may continue facing higher costs and slower growth, though the auto exemption offers a glimpse of potential mitigation.
