Canada and Mexico gambled on a free trade future. The bet is turning sour.

Few countries have bet as heavily on free trade as Mexico and Canada. Now that President Trump says 25% tariffs will hit both countries Tuesday, their economies are facing a stress test that rivals the global financial crisis and the pandemic.

Canada and Mexico have separately signed more than a dozen treaties each—among the most in the world—that give them open access to the markets of more than 50 countries. The most important remains the U.S., Mexico, Canada Agreement, an updated version of the 1994 North American Free Trade Agreement that eliminated most barriers to trade between the three countries. More than 80% of both countries’ exports go to the U.S.

The deal turned Mexico into an export powerhouse, becoming one of the world’s top exporters of vehicles, beer and flat-screen TVs. Canada, for its part, used free trade deals with the U.S., which date to the 1960s, to help vault its now $2 trillion economy into the elite Group of Seven, or G-7.

Their calculus was honed over several decades and became conventional wisdom: a belief that a world led by their neighbor, the U.S., would only become more interconnected and market-oriented. Now, the tariffs could cause big contractions in both countries’ economies, with Canada facing a loss of up to 5% of GDP and Mexico 3%, analysts estimate.

They will need to find a new way forward, focusing more on domestic markets, or trading with fewer countries, trade analysts said. Neither country has an easy short-term fix.

“The U.S. turning its back on this model is a big blow for us," said Juan Carlos Baker, who served as Mexico’s deputy trade minister during negotiations that led to the USMCA’s signing in 2018. “It will mark the end of an era."

For Trump, the tariffs are a means toward ending a period of losing jobs and manufacturing prowess to smaller neighbors. He has promised that new tariffs will provide a new revenue source for the government, cause companies to relocate their operations to the U.S. and force Mexico and Canada to firm up their border policies to stop migrant and drug flows across the border.

Trump has cited those border issues as the cause for the tariffs, with his aides arguing the tariffs are justified under U.S. law allowing such levies if there is a national emergency. In his first term, he imposed tariffs on steel and aluminum imports from Mexico and Canada before backing down.

Even if Trump pulls back eventually from tariffs, the threat has already caused lasting damage in cross-border relations. Trading partners won’t have an incentive to open markets to the U.S., allow investments from the U.S., or boost cooperation to curb illegal migration or drug smuggling, trade analysts said.

“We will have a long road back to Canada and the U.S. being trusted economic partners again," said Matthew Holmes, executive vice president at the Canadian Chamber of Commerce. “Businesses can’t just switch their whole model to avoid tariffs and then go back again, depending on what politicians decide on any given day."

Canada and Mexico are expected to retaliate.

Canadian Prime Minister Justin Trudeau on Monday said Canada would retaliate with its own 25% tariffs on U.S. products. He called Trump’s decision “unjustified." Canada has already published a list of commodities it will target with retaliatory tariffs, including poultry, vegetables, liquor, and appliances such dishwashing machines.

“Because of the tariffs imposed by the U.S., Americans will pay more for groceries, gas, and cars, and potentially lose thousands of jobs," Trudeau said in a statement. “Tariffs will disrupt an incredibly successful trading relationship."

On Monday, the leader of Canada’s most populous province, Doug Ford, threatened to cut off energy supplies to the U.S. “If they want to try to annihilate Ontario, I will do everything, including cutting off their energy, with a smile on my face," said Ford. Ontario supplies energy to Michigan, New York and Minnesota.

Ford called an election in his province in January, claiming he needed a renewed mandate to fight Trump’s tariffs. His right-leaning party was re-elected last week to its third majority government. Trump’s threats have also lifted Trudeau’s unpopular Liberal Party in elections expected this year. Trudeau will step down on March 9, when the party picks a new leader, and an election is expected to be called soon afterward.

Mexico took a more cautious stance, and it has yet to disclose potential retaliatory tariffs. Both countries are likely to target U.S. exports from Republican strongholds and industry groups with political leverage in Washington, according to people familiar with the situation.

Mexican President Claudia Sheinbaum said on Monday that her administration was ready to respond to whatever Trump decides, facing the tariff threat with “composure, serenity and patience."

“There is tranquility, in the sense that whatever the U.S. decision is, we have a plan and unity in Mexico," she said during her daily news conference on Monday.

A worker assembles electronic car keys at a manufacturing plant in Mexico.

Mexico has imposed its own retaliatory tariffs at least five times since Nafta, every time to get the U.S. to withdraw its tariffs—including during Trump’s first presidency—which the U.S. did every time, said Luis de la Calle, one of Mexico’s negotiators of Nafta in the 1990s.

Some U.S. firms with manufacturing operations in Mexico are now calculating the cost of their products when exporting them to the U.S., “something they did not do in much detail before, or not as carefully as they do now," said Jorge González Henrichsen, co-chief executive of The Nearshore Company, a provider of manufacturing services, mostly for U.S. firms.

Mexico’s economic transformation began as a low-wage platform for assembly plants known as maquiladoras that competed head-to-head with China. Mexico gradually emerged as a sophisticated industrial hub and one of the world’s top exporters of electronics or medical equipment. Mexico’s industrial development was notable in a region where large economies, such as Brazil and Argentina, have focused on commodity exports and maintain protectionist barriers.

At that time, many U.S. lawmakers felt that Nafta was a way of ensuring that Mexico would lock in free markets because it was inevitable that at some point a populist would be elected president of Mexico, possibly closing Mexico’s economy.

“Nobody thought it would be a populist president of the U.S. who would close off the market," said de la Calle, now the director of a CMM, an economics and trade consulting firm in Mexico City.

Canada’s history of free trade deals with the U.S. goes back to 1965, when the countries signed a deal to reduce tariffs in the automotive sector. Ties between the countries deepened in 1988, when Canada and the U.S. signed the free-trade agreement, which was later expanded to include Mexico and became Nafta and later the USMCA.

The bet that Canada made beginning in the 1960s that global trade would only increase with the U.S. as the central player, wasn’t a risky one until the sudden shift brought in by Trump, said John Boscariol, head of the international trade and investment law practice at law firm McCarthy Tetrault.

“It wasn’t outlandish to think we should preserve and encourage that relationship," he said. “I don’t think anybody anticipated the shift would happen so quickly."

Write to Vipal Monga at vipal.monga@wsj.com, Santiago Pérez at santiago.perez@wsj.com and José de Córdoba at jose.decordoba@wsj.com