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Investing.com -- The United States has imposed 25% tariffs on Canada and Mexico and an additional 10% tariff on China, escalating trade tensions and raising questions about the future of the US-Mexico-Canada Agreement (USMCA), analysts at Bank of America highlighted in a note Tuesday.
Canada has already announced retaliatory tariffs on $107 billion worth of US goods, while Mexico is expected to follow.
According to Bank of America, complacency around President Trump’s tariff threats meant that “he would have to follow through on one of these threats to maintain credibility.”
However, despite the tensions, BofA does not believe this marks the end of USMCA.
“There are still strong incentives for the US, Canada, and Mexico to reach a deal. Therefore, we don’t expect the 25% tariffs to stay in place for an extended period,” said the bank.
Instead, the analysts expect a renegotiation of USMCA ahead of its scheduled 2026 review, leading to what they call “USMCA 2.0.”
The bank says the tariffs will negatively impact economic growth and inflation, particularly in Mexico, given its 70% trade-to-GDP ratio, followed by Canada at 50% and the US at 18%.
BofA expects the Bank of Canada to cut rates, while Mexico’s central bank, Banxico, will likely cut less aggressively due to inflation risks. The Federal Reserve, meanwhile, is expected to stay on hold.
A prolonged trade war could be more disruptive. BofA estimates that if tariffs remain, Canada’s GDP growth could slow to 1.0% in 2025 from a projected 2.4%, while Mexico could face a 1.0% contraction instead of 0.8% growth.
In the currency markets, BofA warns that USDCAD could spike to 1.50 if tariffs persist, while the Mexican peso may face further downside pressure as risk premiums rise.