How should Mexico and Canada react to incoming tariffs? By Investing.com

Investing.com – As the United States considers 25% higher tariffs on imports from Canada and Mexico, the two countries face tough decisions about how to respond to these potential threats. of business.

BofA Securities analysts warn that the tariffs, if implemented, could rise to a full-scale trade war, with major economic consequences in three countries.

The proposed tariffs, expected to be signed on January 20, will target all imports from Canada and Mexico. The US justifies the move as a way to address its trade deficit, which is important to both neighbors.

However, the interconnectedness of these economies complicates matters. About 30% of Canada’s GDP and 40% of Mexico’s GDP are linked to trade with the US, underscoring the strong dependence that both countries have on their southern neighbor.

Analysts at BofA mark a big difference in the position of the Bank of Canada and the Bank of Mexico to mitigate the economic slowdown caused by the trade conflict.

Both institutions operate under inflation targeting frameworks but face different challenges.

The Bank of Canada is in the process of adopting a more accommodative stance, which is an opportunity to lower interest rates to reduce economic pressure.

With Canada’s inflation rate currently at the 2% target and core inflation measures holding steady, the Bank of Canada has an opportunity to support the economy by easing monetary policy.

Such action could also weaken the Canadian dollar, helping to reduce the impact on Canadian exports.

On the other hand, Mexico’s central bank is facing many challenges. Mexico’s inflation stands at 4%, above the Bank of Mexico’s target of 3%, and inflation remains stubbornly high.

Long-term inflation expectations are unstable, limiting the Bank of Mexico’s ability to lower rates. BofA analysts predict that Bank of Mexico will proceed cautiously, with lower interest rates already included in its 2025 forecast.

While both countries may retaliate with targeted tariffs, the report suggests that avoiding a hike may be better in the long run.

Mexico, for example, has shown willingness to comply with US demands by imposing tariffs on Chinese goods to address the problems of being a conduit for Chinese imports.

Likewise, both countries have stepped up efforts to address US concerns about drugs and illegal immigration, key factors related to the proposed tariffs.

Although BofA Securities considers the imposition of charges to be unlikely, given these mitigation measures, the risks cannot be ignored.

For Canada and Mexico, the choice is between measured retaliation and effective negotiations to avoid economic disruption.

For both countries, prioritizing economic stability while protecting long-term trade relations with the US will remain a key challenge.