Right now, trade within North America is facing major disruption triggered by impending sharp US tariff increases on goods imported from Canada, Mexico, and China.
On February 1, US President Donald Trump issued executive orders imposing tariffs of 25% on all imported Mexican goods and Canadian goods except for energy and critical minerals, which would be tariffed at 10%. He also ordered an additional 10% tariff on Chinese goods, on top of previous hikes.
The tariffs on Mexico and Canada have been postponed for one month as the US negotiates with each country over border security and other issues. The US tariff of 10% on Chinese imports has now come into effect.
The So What
If the tariff hikes unveiled are implemented, their magnitude and breadth will have enormous economic and commercial ramifications and could well redefine the future of trade . The new tariffs would affect 44% of all US imports—or $1.4 trillion in commerce—and every major category of imported goods, raising costs and uncertainty for companies and customers.
“Never would such high tariffs have been imposed on such a complete range of products by such a major trading economy,” says Michael McAdoo , a BCG partner who directs the firm’s work in global trade and investment.
If fully implemented, BCG analysis projects that new tariffs on Canada, Mexico, and China would:
- Add $247 billion to the cost of goods imported by the US based on current trade flows.
- The hardest hit sectors will be auto parts ($36 billion in added cost), automotive vehicles ($30 billion), metals ($19 billion), electrical machinery ($18 billion), and chemicals ($15 billion).
- The impact on the earnings of companies who procure or manufacture a high share of their inputs or finished products from Mexico, Canada, and China could be significant. For three companies—a European tier 1 auto supplier and US producers of medical technology and consumer packaged goods—BCG analysis estimates the tariffs will translate into a 6- to 14-percentage-point hit to EBITDA margins.
These estimates don’t account for retaliatory measures from US trade partners. China has announced retaliatory tariffs on some US products, including 15% on coal and 10% on crude oil, effective from February 10. And Canada has said it would assess 25% tariffs on US goods ranging from poultry and liquor to appliances and motorcycles. It’s also considering curtailing exports of critical minerals to the US. Canada has suspended its retaliatory measures during the 30-day negotiation period.
The business impact would be amplified by the fact companies in most manufacturing sectors have spent decades integrating their North American supply chains and have little time to adapt. For example, Canada and Mexico account for 43% of US imports of packaged foods, 45% of auto parts, and 47% of automotive vehicles.
Companies must prepare for even further change . And this may be just the beginning: President Trump’s executive orders are part of a broader trade agenda. His administration is also considering far-reaching action against the EU and other major partners.
“A new normal for international commerce is a looming reality,” says Marc Gilbert , a BCG managing director and senior partner who leads the firm’s work on geopolitics and the impact on trade. “The threat of higher tariffs clearly calls for business leaders to start making adjustments.”
Now What
There are several actions leaders should take:
Set up a “war room.” For companies that haven’t done so already, there is an urgent need to establish systems to monitor risks and developments across their entire global value chains and for preparing strategies to quickly adapt to tariff changes. This can be done by setting up a war room that brings together all the tasks and information needed to mount a rapid response. Staff would track real-time cost data, market intelligence, and price and supply elasticities for all key products and inputs. They would also analyze alternative sourcing options, model scenarios for how future trade dynamics might potentially unfold, and host regular meetings to review high-priority product categories and strategic decisions.
Reassess your market strategies. Based on this intelligence, develop strategies to minimize the financial impact of tariff changes and remain competitive in key markets. Determine to which degree costs can be absorbed or might be passed to customers in certain markets. How much risk can be mitigated with more sophisticated compliance with trade and tariff rules, by supplying markets from other locations, by using different materials, or adjusting your product portfolio? Account for the fact that higher prices can reduce customer demand and that switching product offerings might disrupt current market strategies. Companies should also explore new markets for their goods.
Build supply chain resilience. If necessary and practical, relocate production or sourcing footprints to nations with lower or no tariffs. Develop dual or multiple-site sourcing options to reduce the risk of disruption caused by further changes to trade policies. Keep in mind that such moves could require significant capital expenditures or tradeoffs, such as reducing economies of scale.
