Deutsche Bank said Monday that Mexico and Canada could enter a recession in the coming weeks as a result of the steep tariffs that the Trump administration has imposed on imports from the neighboring countries.
On Saturday, President Donald Trump declared an economic emergency and signed an order to place tariffs of 25% on all imports from Mexico and Canada, as well as 10% on imports from China. Additionally, a 10% rate is set to be imposed on Canadian energy, including oil, natural gas, and electricity.
In fulfilling one of his post-campaign promises to voters, Trump's action on tariffs also risks triggering higher inflation and disrupting industries across North America.
"The announcements this weekend are roughly three times larger with reasonable passthrough assumptions, i.e., we would expect a 1% U.S. headline inflation impact if tariffs are sustained," George Saravelos, head of FX Research at Deutsche Bank, wrote. "These tariffs are also roughly five times as large as the cumulative sum of trade actions taken under the first Trump administration measured in terms of average tariff increases.
"For Canada and Mexico, we see this trade shock — if sustained — as being far larger in economic magnitude than that of Brexit on the U.K. and would expect both countries to enter a recession in coming weeks."
The tariffs are set to take effect Tuesday and were reportedly put in place to pressure Canada and Mexico to curb illegal immigration into the United States as well as to force the two countries and China to stop the manufacturing and spread of fentanyl.
"We consider the announcements to be at the most hawkish end of the protectionist spectrum we could have envisaged," Saravelos wrote. "The speed of implementation (Tuesday 12:01am EST), the scope (all goods are covered, including small parcel goods previously exempted), and the breadth (approximately 44% of total U.S. imports) are all aggressive."
"It is especially notable that energy imports from Canada are in scope," he said. "Even if at a reduced rate of 10%, that the administration is willing to impose tariffs on energy pushes back against the market narrative that cost-of-living considerations would act as a restraint. The macroeconomic implications of such tariffs are likely to be wide-ranging and materially disruptive, especially outside of the U.S."
The White House on Monday said that it has noticed that Mexico is "serious" about Trump's tariffs, but Canada has "misunderstood it."
"The good news is that in our conversations over the weekend, one of the things we've noticed is that Mexicans are very, very serious about doing what President Trump said," White House National Economic Council Director Kevin Hassett said on CNBC.
"Canadians appear to have misunderstood the plain language of the executive order," he added.