Tariff threats called part of U.S. race with China

Tariff threats against Canada and Mexico are part of a bigger struggle that the United States is in with China, says Christian Lawrence, a senior-cross asset strategist with Rabobank.

In a presentation at the recent Alberta Beef Conference in Calgary, he speculated that Trump is trying to make sure the geopolitical tectonic plates move in the way he wants on a global scale.

In 2024, China had by far the largest trade deficit with the United States at a negative $295 billion, followed by Mexico at minus $172 billion, with Canada No. 9 on the list at negative $63 billion. Rounding out the list above Canada are Vietnam at negative $124 billion, Ireland at negative $87 billion, Germany at negative $85 billion, Taiwan at negative $74 billion, Japan at negative $69 billion and South Korea at negative $66 billion.

“You may be wondering why Trump isn’t focusing on Vietnam, but I think that comes down to on the geopolitical scale, Vietnam is not a big player (unlike China),” said Lawrence.

“Regionally, Canada and Mexico are in focus with Europe as well.”

Canada and Mexico are the most vulnerable with tariffs because exports to the U.S. make up 25 per cent of Canada’s gross domestic product, Lawrence said.

Mexico is even more vulnerable at slightly more than 30 per cent. U.S. exports to Mexico and Canada combined are less than three per cent. Lumping Canada and Mexico along with China cuts off any “backdoor” options for the North American markets to make their way into the U.S..

“I think a lot of people were caught off guard when Canada was grouped in with the initial trade threats, but I think there was a very clear reason why. If you put 20 per cent on China and don’t put anything on Canada or Mexico and they don’t have tariffs with China, then you essentially just create, to put it politely, a bridge and to put it less politely, a backdoor into the U.S.,” said Lawrence.

“Certainly, in Mexico, that has been happening in recent years — a lot of Chinese investment in Mexico as a way of getting into the U.S.”

Lawrence says Trump’s comments about wanting to see Canada become the 51st state should be taken metaphorically rather than literally.

Canada retaliated instantly to Trump’s tariffs, while Mexico took a more diplomatic approach. However, both have a different political environment with Canada in leadership flux because of a pending election coming soon.

“The message here, essentially, is that he wants a unified North America opposing China. My base case has always been that we won’t see lasting 25 per cent tariffs, and we will see some sort of agreement of a unified North American tariff situation facing China,” said Lawrence.

“If we do start to see more in the way of broad base tariffs, there has to be carve-outs for certain industries. The honest truth here is the U.S. is in a much more powerful position, both structurally and cyclically, and it has a lot less to lose from the trade battle. It’s not nice, it’s not pretty, but Trump is leveraging that, essentially. But, I think enough will be done to prevent that worst-case scenario of that 25 per cent being put in more permanently.”

Lawrence said the leverage is the Canada-U.S.-Mexico Agreement, which is set for a joint review in July 2026. During those negotiations, tariffs can be used as bargaining chips.

“Will we see tariffs on certain industries? That is certainly possible. I expect more carve-outs for energy. U.S. refineries in the Midwest still need Canadian heavy crude, they are not set up to deal with the the light crude the U.S. produces. When it comes to potash, the U.S. gets about 87 per cent of their potash from Canada,” said Lawrence.

“So while those outright numbers of the vulnerability might sound like the U.S. has nothing to lose here, it still has significant things to lose when you think of individual products that have a bigger impact than those numbers would imply. For the Northeast, electricity is a big concern. We were sitting in the office in New York when they announced in Ontario they might cut off the electricity to Michigan, Minnesota, and New York. About 15 per cent of New York’s electricity is often coming from Canada.”

Tags: China, exports, United States, Canada, Mexico, tariffs