Canada-US Trade and Tariffs

• The Canadian export economy is deeply connected with that of the US economic environment
• About 75% of Canada’s goods exports go to the U.S., leaving key sectors heavily exposed
• Canadian exporters will see their competitiveness in the U.S. market decrease due to new tariffs, a 25% tariff on Canadian goods means products become significantly more expensive for American importers

Affected Industries in Canada

• Car and truck automotive manufacturing is at risk. North American car production depends on parts crossing the border multiple times.
• Industrial machinery and equipment will also be affected, due to much of it being sold to U.S. buyers or integrated into U.S. supply chains
• Energy exports, particularly oil and gas now face a 10% levy for oil, on top of any existing duties
• Metals and mining industries like steel and aluminum were already under U.S. tariffs and face an additional 25% tariff
• Agriculture and agri-food products are similarly vulnerable because the integrated North American market relies on cross-border shipments to build cars and machinery, refine energy, and process agricultural goods

Impact on Canadian Exporters and Businesses

• Canadian exporters will see their competitiveness in the U.S. market decrease
• A 25% tariff on Canadian goods means Canadian products become significantly more expensive for American importers, likely causing U.S. customers to cut orders or seek alternate suppliers
• Export-reliant firms in Canada may suffer revenue declines and could be forced to cut jobs or scale back production if demand falls
• Supply chains that span the border (especially in manufacturing) face disruption, as components stuck with tariffs throw off just-in-time production schedules
• Business confidence in Canada has been shaken. Major Canadian banks have noted rising anxiety and uncertainty among their clients
• Some companies might even consider shifting production to the the U.S. to avoid tariffs, though this involves major costs and upheaval
• The Canadian Chamber of Commerce warned that the U.S. move is a reckless decision that could reverberate through Canada’s economy, causing job losses and even pushing Canada (and the U.S.) toward recessions if the trade war intensifies
• Canadian businesses large and small are bracing for financial stress as their largest export market imposes new barriers

Effects on Consumer Prices in Canada

• Canadian consumers are likely to feel higher prices for many goods as an indirect result of these tariffs
• Broad tariffs and the ensuing retaliation will raise prices of many goods in Canada
• Canada’s retaliatory measures target a range of everyday products imported from the U.S., meaning shoppers will pay more for those items
• Ottawa's initial response included a 25% surtax on common U.S. exports like orange juice, peanut butter, coffee, wine, beer, appliances, and motorcycles
• A jug of Florida orange juice or a kitchen appliance made in the U.S. will become notably pricier for Canadian families
• Overall consumer costs could creep up due to broader inflationary pressures
• Trade tension has already weakened the Canadian dollar against the U.S. dollar, which makes all imports more expensive in Canadian currency
• Higher import costs, whether on tariffed U.S. goods or goods from elsewhere priced in U.S. dollars, will feed into higher inflation in Canada
• Economists estimate the tariffs could lift Canadian core inflation by roughly 0.8 percentage points in the near term
• Canadians may face a double whammy of rising prices, directly on U.S. products hit by retaliatory tariffs, and indirectly as the overall cost of imports climbs

Overall Economic Implications for Canada

• The macro-economic impact on Canada is expected to be negative and potentially severe
• The United States is Canada’s largest trading partner by far, so new barriers to trade threaten to slow Canada’s economic growth
• Early estimates suggest the tariffs will act as a sizable drag on Canada’s GDP
• One major bank analysis found that a 25% U.S. tariff on Canadian goods could reduce Canada’s GDP by as much as 5% relative to baseline over a couple of years if the dispute persists
• In the immediate future, forecasters are warning of at least a modest downturn: Canada’s growth could stall or even slip into a mild recession if exports plunge
• Business investment is likely to pull back due to the uncertainty, and export-oriented regions (like Ontario’s manufacturing heartland and energy-producing provinces) could see job losses
• Financial markets have already reacted. The tariffs sparked a global selloff and pushed the Canadian dollar down, reflecting investor fears of a Canadian slowdown
• Canada’s banks are preparing for tougher times. They collectively set aside over C$1 billion in loan-loss provisions, anticipating that tariff-related stress could lead to more bankruptcies or loan defaults
• Inflation adds another complication. Unlike a typical downturn, this trade shock raises prices even as it dampens growth, creating a stagflation risk
• The Bank of Canada may face a difficult choice between cutting interest rates to support growth or raising them to contain tariff-fueled inflation
• Overall, the tariffs threaten to dent Canada’s output, employment, and fiscal revenues, with the shock concentrated in export-dependent industries
• Canadian economic leaders describe the situation as one that is forcing Canada and the U.S. toward recessions, job losses and economic disaster

Potential Canadian Government Response

• The Canadian government has responded with a mix of retaliation, relief, and diplomacy in an effort to protect its economy:
• Canada answered immediately with equivalent tariffs on U.S. goods
• 25% duties on about C$155 billion worth of American imports took effect as soon as the U.S. tariffs were implemented
• Counter-tariff package is being rolled out in two phases: an initial C$30 billion worth of U.S. goods (including food, beverages, and consumer products) hit with 25% tariffs right away, and the remaining C$125 billion (potentially including autos, steel, and other big-ticket items) after a short consultation period
• These Canadian tariffs will remain in place until the U.S. trade action is withdrawn
• Officials have said all options remain on the table, including non-tariff measures if the conflict escalates
• Ontario’s premier banned U.S. companies from bidding on provincial government contracts and even threatened a 25% surcharge on electricity exports to the U.S. if the tariffs persist

Legal challenges

• Canada is also pursuing formal dispute resolution. The Trudeau government has indicated it will challenge the U.S. tariffs under the rules of the USMCA (United States–Mexico–Canada Agreement) and at the World Trade Organization
• Canada argues that the “national security” justification for these tariffs is illegitimate and violates trade agreements
• Under USMCA, Canada can request a dispute settlement panel to adjudicate the legality of the U.S. tariffs, but this process could take months
• U.S. may claim extraordinary exemptions
• By initiating legal action Canada reinforces that it views the tariffs as breaching international legal obligations and puts additional pressure on the U.S. to justify or remove the tariffs

Domestic Support Measures

• To cushion the domestic impact, the Canadian government is readying support for affected workers and industries
• Ottawa has announced the creation of a tariff relief (remission) program to help businesses hurt by the tariffs
• This could include refunds or exemptions for certain critical imports hit by Canada’s own retaliatory duties, so that Canadian manufacturers aren’t unduly harmed by retaliation meant to pressure the U.S.
• The government may also provide financial aid or adjustment assistance to major exporters, support for auto parts manufacturers or steel mills facing losses
• Federal and provincial governments are working closely with business and labor leaders to form a united response
• Additional tax breaks, subsidies, or sector-specific relief packages are on the table as the situation develops

Economic Diversification and Diplomacy

• In the longer term, this crisis is prompting Canada to consider reducing its vulnerability to U.S. trade actions
• Diversifying trade partnerships is one theme, for example, expanding exports to Europe and Asia (building on agreements like CETA and CPTPP) to rely relatively less on the U.S. market
• There are renewed calls for strengthening the domestic Canadian market, governments and businesses must pull together to remove the obstacles that hold back national productivity and strengthen our competitiveness
• This refers to steps like removing inter-provincial trade barriers and accelerating infrastructure and resource projects to make the economy more self-reliant
• On the diplomatic front, Canadian officials at all levels are engaging U.S. counterparts to press for a reversal, highlighting that the tariffs hurt Americans too (for instance, U.S. automakers rely on Canadian parts, U.S. oil refiners need Canadian crude, etc.)
• Canada is coordinating with other affected trading partners (like Mexico and the EU) to present a united front against protectionism
• The hope is that domestic U.S. backlash, from industries and consumers hit by higher costs, combined with coordinated pushback will convince the U.S. administration to reconsider the tariffs

Trade Relations Between Canada and the U.S.

• The imposition of these tariffs has brought Canada–U.S. trade relations to a new low point
• The two countries have enjoyed decades of increasingly free trade under agreements like NAFTA and its successor USMCA, but this executive action has sharply reversed that trend
• Canadian leaders view the tariffs as a betrayal of the spirit and letter of our trade agreements
• Prime Minister Trudeau called the U.S. move unacceptable and emphasized that it will disrupt an incredibly successful trading relationship, violating the USMCA free-trade pact that the U.S. itself negotiated
• The longtime allies are now locked in a trade war of retaliation and counter-retaliation
• Trust between the two partners has been seriously eroded due to both Canada and the US markets being so tightly intertwined
• Diplomatic relations have grown tense, with Ottawa and Washington exchanging pointed statements rather than the friendly dialogue that normally characterizes their interactions
• This conflict has stalled further cooperation on cross-border economic initiatives, and it could spur Canada to reduce its dependence on the U.S. market, a strategic shift that has been discussed for years but might gain momentum now
• Both countries have much to lose from a prolonged rift which could impact the North American supply chain and the goodwill between neighbors, built over generations, are at stake
• Observers note that the tariffs have undermined the spirit of partnership and set a dangerous precedent of using national security to justify hitting an ally with economic sanctions
• Past trade disputes like the 2018 steel tariffs were ultimately resolved through negotiation, and many hope cooler heads will prevail again
• How and when this dispute is settled will shape the future of Canada–U.S. relations
• Both nations now recognize that even the closest allies are not immune to trade conflict, underscoring the importance of strong dispute-resolution mechanisms and the need to rebuild trust once this episode passes