With President-elect Donald Trump about to assume office next month, one thing is clear: He is not wasting time implementing the agenda he campaigned on. Trump knows that he has a two-year window to act in which Republicans will control both houses of Congress.  A key development since the election is Trump’s threat to raise tariffs for Canada and Mexico by 25 percent and those for China by 10 percent. Such action, if implemented, would be significant considering the three countries are the largest trading partners of the U.S. and they account for about 45 percent of U.S. Imports.  Financial markets have taken the news in stride because many investors view the threats as a bargaining ploy to extract concessions. They are also aware that the next review of the U.S.-Mexico-Canada Agreement is slated for 2026, and Trump may be positioning to modify it.    To understand what is at stake, one must consider why Trump scrapped the North America Free Trade Agreement during his first term. NAFTA established a free-trade zone in North America that took effect at the beginning of 1994 when Europe was making preparations for the launch of the eurozone at the end of the decade. It immediately lifted tariffs on the majority of goods produced by the three member countries and called for the elimination of most remaining barriers over a period of 15 years.    President Clinton anticipated that NAFTA would create 1 million U.S. jobs in the first five years in his remarks at the signing.  When this did not happen, manufacturing workers blamed NAFTA for sending jobs to Mexico, where wages were considerably lower than in the U.S.  Trump seized on this issue during the 2016 presidential campaign, calling NAFTA “the worst trade deal ever made.” When the USMCA agreement was signed in mid-2020, he touted it as “the best and most important trade deal ever made by the USA.” The Trump administration anticipated that it would create 75,000 manufacturing jobs, but the onset of the COVID-19 pandemic stood in the way.  One of the main provisions was that the USMCA created a new incentive to build cars and trucks in North America. Namely, it requires 75 percent of a vehicle’s parts to be made in one of the three countries and also stipulates that more vehicle parts be made by workers earning at least $16 an hour, which was viewed as advantageous to the U.S.  Why then is Trump now willing to jeopardize the agreement by threatening duties on Mexico and Canada? Trump’s stated reason is that he wants to ensure that both countries take adequate measures to prevent illegal crossings of migrants and drugs into the U.S. But why should the same penalty apply to Canada as to Mexico? Illegal immigration and the flow of drugs, after all, are substantially greater through the southern border of the U.S.  Christopher Sands, Director of the Wilson Center’s Canada Institute, points out that it would not be unprecedented for border and migration cooperation to be part of the 2026 USMCA review and commitments in these areas to be included in a revised agreement. He notes that USMCA also brought environmental commitments into the main body of the agreement.  His advice is to “Take the threats as a prelude to negotiations,” as there will be ample time to develop bargaining positions.  My take is that Trump is also trying to close a loophole that has enabled China to circumvent tariffs by setting up facilities in countries that are not subject to high tariffs.  During the initial round of the trade conflict, for example, China was able to reroute exports through Mexico and Vietnam. Thus, while U.S. imports of Chinese goods fell by about $110 billion from 2018 to 2023, imports from Mexico and Vietnam increased by about $130 billion and $70 billion, respectively.  Trump plans to make it more difficult for countries to evade tariffs this time.  During the presidential campaign, Trump threatened to increase tariffs on electric vehicles produced by Chinese companies in Mexico by 100-200 percent, even though no Chinese firm has produced a single car there thus far.  So, how are businesses coping with the uncertainty about tariffs?  The most common way is by placing orders for goods from abroad well before tariffs go into effect. CNBC reports that uncertainty among U.S. shippers is also escalating heading into 2025. Logistics firm C.H. Robinson said it is fielding inquiries about front-loading of freight ahead of potential tariff hikes, and Everstream Analytics reports that inventories are already increasing.  Some companies nonetheless face a challenge in deciding where to locate their production facilities. The Economist notes that several American firms have paused investments in Mexico, including Tesla, run by Elon Musk. Adding to the uncertainty is the prospect that countries could retaliate. Mexico’s President Claudia Sheinbaum has stated that Mexico could impose its own tariffs to retaliate if Trump hikes tariffs. Canadian Prime Minister Justin Trudeau has also vowed that Canada would retaliate if Trump followed through on his threat.  It is too early to tell how these developments will play out, but one thing is clear: If Mexico and Canada were to retaliate, the most visible impact on the U.S. would be higher oil and gas prices. The cost for Mexico and Canada, however, would be considerably greater because of their high dependence on the U.S. market. My bottom line is that investors and business leaders may not take Trump’s threats at face value, but it would be a mistake to dismiss them altogether. If Trump proceeds down the path he is advocating, his actions could have unforeseen consequences for the global economy.  Nicholas Sargen, Ph.D., is an economic consultant to Fort Washington Investment Advisors and is affiliated with the University of Virginia’s Darden School of Business. He has authored three books including Investing in the Trump Era; How Economic Policies Impact Financial Markets.