07:33 AM EST, 11/28/2024 (MT Newswires) -- United States President-elect Donald Trump Monday sent a slight shockwave through financial markets by announcing that he would impose tariffs of 25% on Canadian and Mexican imports and 10% higher tariffs on Chinese imports from the first day of his new administration, said Commerzbank.

This announcement was intended to respond explicitly to such comments -- to send a clear signal to the world that tariffs would be imposed first and negotiations could follow, wrote the bank in a note to clients. It wasn't without reason that Trump chose Mexico and Canada to make the announcement.

After discussions -- including Trump's clear criticism -- both countries decided to revise their free trade agreement with the US, which came into force on July 1, 2020. Not only are such tariffs completely at odds with the nature of the agreement, and a revision of the accord wasn't agreed upon until 2026, but the current agreement was negotiated during Trump's first term in office, so he approved it.

As a consequence, Trump is sending a very clear signal that even existing agreements, even if they were negotiated under him, will no longer be safe from January, stated Commerzbank.

Trump isn't necessarily the biggest fan of economic arguments, but some aspects of this announcement are problematic, pointed out the bank. Both Canada and Mexico are almost entirely dependent on the US as an export market, but they export fundamentally different goods to the US.

Mexico has benefited greatly in recent years from companies locating production there, bringing the supply chain closer to the US market. As a result, Mexico exports a large number of manufactured goods to the US, such as machinery and vehicles. These are the goods for which Trump urged companies to move production directly to the US during his election campaign.

Whether you think this makes sense or not, it would at least be easier than moving production of Canada's export hit: oil. Almost 66% of US crude oil exports this year came from Canada.

Because of its high sulfur content, this oil cannot simply be replaced by buying it on the world market -- which would probably also result in higher prices. US refiners will have to pay higher prices or Canadian exporters will have to accept lower prices, or probably a combination of both.

Commerzbank's point is that US consumers will certainly be among the first to feel the price effects of higher tariffs. It certainly doesn't make economic sense to impose tariffs across the board, apparently trying to move production to the US, if the goods can't be produced in the US -- not to mention the fact that the other arguments, including stemming the flow of drugs and illegal immigration -- don't apply for Canada to the same extent as they do for Mexico.

This is a purely economic perspective, added the bank. Trump may well be aware of these points, but then one would have to fear that he doesn't care -- and all other countries should prepare to be hit with tariffs almost indiscriminately to get US concessions. But then all the assumptions made in recent weeks about Trump's behavior would probably be invalidated.

Currencies that were originally thought to be relatively protected from tariffs would suffer. The Canadian dollar (CAD or loonie) would likely come under more pressure.

Or it was just one of those announcements that won't be implemented, added Commerzbank. Trump probably wanted to send a clear signal with this announcement: that he means business and that other countries will have to make significant concessions.

While it isn't entirely clear what such concessions would look like -- and whether they would really be better than tariffs -- the bank tends to bet on changes in Canada rather than Mexico. The simple reason for this is that these countries represent two very different cases, which would make differentiation appropriate.

If this is the case, the CAD should be able to recover somewhat, while the Mexican peso would remain under pressure, according to Commerzbank