Tariffs on Canada and Mexico go live

After weeks of stays and diplomatic manoeuvring, the 25 per cent tariffs on all imports from Canada and Mexico have taken full legal effect, along with a duty on Chinese goods that has been raised to 20 per cent. The United States-Mexico-Canada Agreement (USMCA) was meant to keep goods that meet its regional content rules free of duty, and the administration has hinted that such goods may yet be carved out. At the border crossings, the reality this week is congestion, arguments over classification and rising clearance costs.

The pause runs out

The tariffs arrive on the timetable set in early February, when both neighbours won a 30-day reprieve by promising tighter border enforcement. Those promises were delivered, at least on paper: Mexico sent troops north and Canada appointed officials to police fentanyl. The White House decided they were not enough. Canadian energy is taxed at a lower 10 per cent, a concession to refiners in the Midwest that depend on Alberta's crude, but almost everything else crossing either border now pays the full rate.

Retaliation came within hours. Ottawa imposed 25 per cent duties on C$30 billion of American goods at once and said a further C$125 billion would follow in three weeks. Beijing answered its own increase with tariffs of 10 to 15 per cent on American farm goods, from soyabeans and pork to chicken and wheat, due to take effect next week. Mexico said it would set out its response within days. American exporters of food and consumer goods, who had nothing to do with fentanyl, are now paying for the dispute.

Sixty years of integration

The system now under strain was built deliberately. The Auto Pact of 1965 removed tariffs on cars and parts between Canada and the United States, and plants on both sides began to specialise. NAFTA brought Mexico in from 1994, and carmakers moved labour-intensive work south. The USMCA, negotiated by the same president in his first term, tightened the rules by requiring 75 per cent of a car's core content to come from the region to qualify for duty-free treatment. Companies spent billions reshaping supply chains to meet that test, on the understanding that meeting it bought certainty.

Parts that cross the border repeatedly

North American manufacturing runs on tightly linked just-in-time delivery networks. Car sub-assemblies and machinery parts often cross the border several times before final assembly. A 25 per cent duty on these intermediate goods breaks that system. Even parts that qualify for any USMCA exemption face long paperwork delays and audits, as customs officers struggle to check the origin documents.

The arithmetic compounds at each step. A wiring harness made in Mexico, fitted into a seat in Michigan, and shipped to an assembly plant in Ontario, before the finished car returns south, can be taxed on the way in more than once. Duty drawback, a scheme that lets exporters reclaim most of the tariff paid on imported inputs that are later re-exported, offers partial relief. It is slow and paper-heavy, however, and the refund arrives months after the cash has left the business.

Proving origin is itself costly. To claim preferential treatment a supplier must trace where each component came from and document the value added in the region, often across several tiers of sub-suppliers. Large carmakers have compliance departments that do this routinely. A small machine shop in Ontario or Nuevo León often does not, and a customs officer who doubts its paperwork can hold a shipment while the assembly line it feeds waits.

Cash tied up at customs

Manufacturers that work across the border must now draw much more on their credit lines to post customs bonds and pay import duties up front. Smaller suppliers running on single-digit margins could run out of cash within ninety days unless the big carmakers absorb the levies.

The bond is where the squeeze starts. American customs requires regular importers to hold a continuous bond sized at roughly a tenth of the duties they paid over the past year. When duties jump from nearly nothing to a quarter of the value of every shipment, the required bond jumps with them, and the surety companies that write bonds ask for more collateral from firms whose balance sheets are thin. A supplier can find its working capital tied up twice: once in duties paid at the border, and again in collateral posted to keep importing.

Who absorbs the bill

Carmakers face an unpleasant choice. They can raise sticker prices at a time when high interest rates have already made new cars hard to afford, or they can pay suppliers' tariff bills and accept thinner margins. Detroit's three big manufacturers are the most exposed, because their North American networks are the most integrated, while Japanese and Korean rivals that ship more vehicles from Asia face different, though not smaller, risks from the reciprocal tariffs promised for April. Canadian and Mexican workers in parts plants carry the risk of lay-offs if orders are cut.

The price effect will arrive with a lag. Dealers hold weeks of vehicles bought before the tariff, which delays the rise on the forecourt but does not prevent it, since replacement stock arrives carrying the duty. Buyers who can wait will, and a pause in purchases would hit carmakers' volumes just as their costs rise.

What would change the call

The most important signal is whether the administration formally exempts goods that already meet USMCA rules, which would restore most of the duty-free trade in cars and parts while leaving the tariff in place for everything else. The steel and aluminium duties that take effect on March 12th, and the reciprocal tariffs promised for early April, will add further layers. Watch the daily wait times at the Detroit and Laredo crossings, and any announcements of shift cuts at assembly plants, for the first physical signs of damage.

Even a quick carve-out would not undo the lesson that suppliers have just learned. The tariffs have ended the duty-free certainty on which North American factories were built, and the cash drain will probably show up within a few months as lower output and higher car prices, with the smallest parts makers on both sides of the border the first to run short of money.