What tariffs could mean for the Canadian economy

Ever since U.S. President Donald Trump signalled his intent to impose a broad-based 25-percent tariff on all goods flowing from Canada to the U.S., economists have been weighing the potential short- and long-term impacts on Canada’s economy. The stakes could not be higher. 

There is widespread agreement that economies on both sides of the border would feel significant pain. In Canada’s case, forecasts range from around two- to four-percent declines in GDP. Investment would suffer and unemployment would rise. As one recent report noted, the tariffs “could wipe out Canadian growth for up to three years.”

Here are summaries of the major reports from top economists, modelling what could happen to Canada in the coming months and years:

Bank of Canada

In late January, the Bank of Canada (BoC) published a quantitative example of the impact a broad-based 25 percent tariff could have on the Canadian economy over the next three years. 

• “In the benchmark calibration, average annual GDP growth in the first year is about 2.5 percentage points lower than it would otherwise be,” the BoC estimated. “In the second year, it is about 1.5 percentage points lower. By the third year, GDP growth has roughly returned to normal.” 
• In other words, the BoC concluded, “if annual average growth were projected to be 2% in years 1 and 2 with no new tariffs, then the growth forecast would be about -0.5% in year 1 and 0.5% in year 2 with the new tariffs.” (In October, the BoC projected that Canada’s GDP growth for the first half of 2025 would be around 2 percent and increase to 2.5 percent in the second half of the year.)
• “While the effect of the tariffs on the rate of growth is temporary, the level of GDP is permanently lower, reflecting a decline in the long-run level of Canadian productivity due to the distortionary effects of the tariffs,” the BoC wrote. Additionally, because of the assumed increase to consumer costs, “CPI inflation is subject to sustained upward pressure over this period,” the BoC wrote. “Considerable excess supply and declining commodity prices largely offset the direct impact of tariffs in the first year, but inflation rises as excess supply is gradually absorbed in subsequent years.”
• In a speech earlier this month, BoC Governor Tiff Macklem noted that if Trump’s proposed tariffs were to be imposed, “they will test the resilience of our economies in the short run and reduce long-run prosperity.” He also said that “there will be less investment and lower productivity. That means our countries will produce less and earn less. Monetary policy can’t change that.”

RBC Economics

While acknowledging the uncertainty of making predictions, RBC concludes that the proposed Trump administration tariffs would be the “most significant trade shock” to Canada since the 1930s. 

• If sustained, a broad-based tariff of 25 percent on Canadian goods “could wipe out Canadian growth for up to three years,” RBC’s chief economist, Frances Donald, and assistant chief economist, Nathan Janzen, wrote in early February. 
• RBC’s impact estimates align with those of the Bank of Canada, “which simulates that a 25% increase in tariffs across the board (U.S. and global) would reduce Canadian GDP ranging from -3.4 to -4.2 percentage points, compared to the baseline forecast.”
• Donald and Janzen also note that the proposed tariffs could land at a time when Canada’s economy is ill-prepared to absorb them. “GDP per capita has declined for eight of the past nine quarters, and business investment has been stagnant,” they write. “Both cyclically and structurally, Canada’s economy is not well positioned to absorb a shock of this scale.” 
• They also note that, among the potential responses to the tariffs, is the BoC moving faster to lower the key interest rate to 2 percent by the end of 2025.

TD

Like others assessing the potential impact of the tariffs, TD noted that it will depend on multiple factors, including the depth and breadth of the tariffs once they are imposed, what retaliation Canada chooses to launch, and for how long the tariffs (and the retaliatory measures) remain in place. 

• If the tariffs were to remain in place for five to six months, TD said in its Feb. 1 update, “it would officially tip the domestic economy into recession, albeit a relatively shallow one at that point.” But the longer it lasted, the more it would hurt.
• TD also noted that “the unemployment rate would cross the 7% threshold within that six-month period, instead of our baseline scenario from mid-December that saw it fall to 6.4%.”
• The American economy would also suffer. Tariffs would escalate costs “on roughly 40% of imported goods across three major economic regions, amounting to roughly 5% of GDP.” Six months of tariffs “could see the economy grind to a halt.” TD noted that “during Trump’s first term that skewed tariffs more heavily to China, the impact hit about $360 billion in imports.” Now, that figure is more than $1.3 billion.
• TD did not account for potential moves from Canadian governments to “buffer the economic impact via financial supports,” but that “the greater the income supports to insulate Canadians, the higher the possibility that inflationary pressures linger from tariffs.”

Fitch Ratings

Fitch took a look at the impact of the potential tariffs on Canada’s provinces, noting that they are “highly reliant on international trade, most of which is with the U.S.” Fitch noted that trade with the U.S. varies greatly by province — for example, the U.S. buys 93 percent of Alberta’s exports, but just 42 percent of those from Newfoundland and Labrador. 

• In its estimate, Fitch concluded that “production from oil, gas and mining, concentrated in western Canada, would likely be among the hardest hit, affecting non-renewable resource revenue in Alberta, Saskatchewan and British Columbia.” 
• But, Fitch said, “machinery and transportation equipment would also be affected, with manufacturing powerhouses Ontario and Quebec bearing the brunt due to their large steel, aluminium, automotive and related sectors.” (With the Trump administration’s announcement of tariffs on steel and aluminum, set to begin March 4, these provinces are likely to be the first to feel the impact.)

Canadian Chamber of Commerce

The Canadian Chamber of Commerce’s Business Data Lab has released two reports on the impact of tariffs at a subnational level. In November, the Chamber released what it called “alarming new figures” projecting the impact of potential a 25 percent broad-based tariff on Canada’s provinces. 

• The Chamber estimated that Canada’s GDP would shrink by 2.6 percent, costing Canadians approximately $1,900 per person annually. At the same time, the Chamber estimated that US GDP would shrink by 1.6 percent, costing Americans approximately $1,300 per person annually. 
• “Make no mistake, if Trump imposed these tariffs, it would represent a significant negative shock to the U.S. economy. It would raise costs for businesses, make American production less competitive internationally, and raise prices even more for consumers who’ve recently suffered through the pandemic and the highest inflation in generations,” said Stephen Tapp, the Chamber’s chief economist.

In February, the Chamber also looked at how exposed 41 of Canada’s cities are to tariffs. 

The Chamber found that Canada’s key export cities, Calgary and Saint John, NB, would be hit hardest by the tariffs, but that tariffs will hurt major manufacturing centres as well.

• Saint John’s proximity to the Irving oil refinery, the largest crude oil refinery in Canada, and Calgary’s position as a major hub for oil and gas leave them most exposed.
• However, Ontario cities with deep ties to the auto industry — Windsor, Kitchener-Waterloo and Brantford — would be the second-most vulnerable to the tariffs. Hamilton, home to major steel operations, is next on the Chamber’s list.
• Finally, Quebec’s most trade-intensive cities, Saguenay and Trois-Rivières — both home to aluminum production — also rank high on the list. 
• Canada’s cities with more diverse trade portfolios, or that have multiple international markets (e.g. Sudbury, with its global mineral opportunities), are less exposed in the Chamber’s valuation.

Council on Foreign Relations

The U.S. think tank has offered perspective on the potential impact of the Trump administration’s proposed tariffs from the American side, noting that the US auto, energy and food sectors could be particularly hard-hit. 

For instance, it predicts that gas prices in the American midwest might jump by more than 50 cents per gallon. The CFR also points to evidence that the tariff’s impact on auto production might mean that cars in the U.S. could cost up to $3,000 more.