The 25% tariffs imposed by the US on imports from Canada and Mexico will likely be short-lived, despite the immediate economic tensions, analysts at Bank of America said.
While the tariffs are set to escalate tensions across North America, the bank’s economists expect these measures to be temporary, driven by their disruptive effects on US business interests.
The move, which includes additional 10% tariffs on Chinese imports, is seen as part of a broader strategy to exert leverage during renegotiations of the US-Mexico-Canada Agreement (USMCA), which could be fast-tracked for review well before its scheduled 2026 revision.
Analysts outlined three reasons why the 25% tariffs may not be permanent.
“First, they would be disruptive for the US, and US business groups are already exerting pressure on the Trump administration,” analysts wrote.
“Second, they will be hard to implement due to the high degree of integration in manufacturing in North America.
“Lastly, we think Canada and Mexico are likely to agree to most of Trump's terms on migration and drugs.”
Despite the expected brevity of these tariffs, the economic impact could still be significant in the short term. Bank of America forecasts lower growth and higher inflation across the board as a result.
“The tariffs are likely to induce small negative growth in the US, while contributing a larger upside effect on inflation,” analysts noted.
The Federal Reserve is expected to keep rates on hold, while Canada and China may have room to respond with policy stimulus. However, Mexico, facing its own economic challenges, has limited capacity to do so.
While the tariffs on Canada and Mexico may prove temporary, Bank of America economists warn that an extended trade war could lead to more lasting disruptions, especially in manufacturing.
“If the tariffs linger for longer, Canada might avoid recession, but Mexico may struggle as it faces high rates to protect its currency,” the bank noted.
If the tariffs continue beyond the short term, both countries could face a significant slowdown, with Mexico possibly entering a recession.
As for US businesses, Bank of America expects industries with heavy exposure to Canadian and Mexican manufacturing to feel the pinch, particularly in the form of margin declines. While US companies may counterbalance this by adjusting pricing and sourcing strategies, the overall impact on multi-industrial stocks could be significant.