The U.S. trade war and what it means for Canada
The United States launched a trade war against Canada and Mexico, its biggest, most important trade partners, announcing that it will impose tariffs of 25 percent on all goods crossing the border, and a 10 percent levy on Canadian energy. The tariffs are set to take effect on Tuesday, Feb. 4.
On Saturday evening, Prime Minister Justin Trudeau announced retaliatory measures, with 25-percent tariffs on $155-billion worth of U.S. goods, starting on Feb. 4 with tariffs on $30-billion worth of goods and further tariffs on $125-billion of American products in 21 days.
It represents an unprecedented shift in Canada-U.S. relations and in global trade, with dubious economic justification. Roughly $3.5 billion worth of goods and services cross the Canada-U.S. border every day. And Canada supplies the U.S. with energy, lumber, food and critical minerals, as well as manufacturing components such as auto parts, among many other essential goods.
There is widespread agreement that the move will have devastating impacts on both sides of the border.
Here, we’ve pulled together some recent words of wisdom from PPF friends to help make sense of what’s happening — including why Donald Trump is putting tariffs on Canada:
Why did Canada retaliate?
Canada likely had no choice but to respond with counter tariffs, PPF Fellow Steve Verheul originally told us a few months ago. Verheul, a principal at GT & Co. Executive Advisors, was Canada’s chief trade negotiator for the CUSMA free trade deal and has sat across the table from the Trump team.
“The notion of making concessions to the U.S., including by not retaliating, in my experience with this administration, you don’t get anything for providing concessions for free,” he said on PPF’s podcast WONK late last year. “They will just take them and move on and look for more. If you do something good for them, they just expect it and it gains you nothing. So, I think we need to be cautious about thinking we can make friends with the team in the U.S. right now. This is not the kind of relationship we’re likely to have or certainly did not have the last time.”
What does a trade war mean for the oil and gas industry?
Trump announced smaller 10-percent tariffs on Canadian energy imports. It was an acknowledgment that tariffs will drive up prices for American consumers — and higher prices at the pump would be an especially hard pill for American consumers to swallow.
The U.S. and Canadian energy industries are deeply interconnected. Oil and gas represent about 20 percent of Canadian exports to the U.S., and in some regions America relies on Canadian crude and electricity. Jackie Forrest, executive director of the ARC Energy Research Institute, explains the impact tariffs will have on the oil industry:
“Especially in the Midwest where the margins are very narrow, they really can’t afford to pay all that [added cost]. So I think that will result in Canadian producers having to take some price discount. If [Canada] had to take all of it, it would be absorbing that [cost] as a lower price for our crude oil to offset the price of the tariff to the refiner. That’s kind of the extreme bookend.
The other extreme bookend is they absorb it all and then it gets passed through to refined product pricing. But because many refiners don’t actually set the price of refined products in their market, I don’t think they’re able to pass all of that on to the consumer as well. So that’s where we get to there’s probably going to be some shared pain.”
How will Canadian counter-tariffs work?
Tariffs are an import tax paid by importers (not foreign governments or exporters). Canada’s tariff will be paid by companies that import American goods, and the added cost is most often passed on to consumers. That’s why there are no winners in a trade war — everyone pays and hurts.
PPF Fellow and economist Trevor Tombe estimates that retaliatory tariffs could cause consumer prices to rise by 4.1 percent.
Why is Trump putting tariffs on Canada?
Announcing the tariffs on X, Trump said the tariffs are “because of the major threat of illegal aliens and deadly drugs killing our Citizens, including fentanyl.”
The tariff order says that Canada has allowed Mexican cartels to operate drug labs here. Last year, 19.5 kilograms of fentanyl was seized entering the U.S. from Canada, compared to 10 tonnes of fentanyl crossing from Mexico.
READ MORE: What are tariffs?
Trump is a strong believer in tariffs as a source of revenue (tariffs paid by importers go to the U.S. Treasury) and a way to get manufacturers to move operations to the U.S. He has described tariffs as “the greatest thing ever invented” and said in his inaugural address: “We will tariff and tax foreign countries to enrich our citizens.”
If taken at his word, Trump also wants to inflict economic pain on Canada in the hopes that it will be become America’s 51st state. After launching the trade war, Trump wrote:
“We pay hundreds of Billions of Dollars to SUBSIDIZE Canada. Why? There is no reason. We don’t need anything they have. We have unlimited Energy, should make our own Cars, and have more Lumber than we can ever use. Without this massive subsidy, Canada ceases to exist as a viable Country. Harsh but true! Therefore, Canada should become our Cherished 51st State. Much lower taxes, and far better military protection for the people of Canada — AND NO TARIFFS!”
Will manufacturers move to America to avoid tariffs?
This is what Trump hopes will happen, and in the long run it may work. Businesses crave stability when they make long-term investment decisions, and if there is a constant threat of tariffs and trade wars, it makes little sense to build-up manufacturing outside of the U.S.
But reality is not so simple, explained Brett House on a recent episode of WONK: “[The Trump team is] squaring the circle in their minds by thinking that the shift in demand toward domestically produced goods and services will be so great and that it will stimulate additional investment and output sufficiently to prevent some of that increase in tariffs. But that is a misunderstanding of the timing and the responsiveness of business and borrowing to the shifts that they’re bringing in on the policy front. You cannot suddenly create a local supply chain out of the blue. Putting up these tariffs is not only going to increase the prices for imported goods and services, but if demand shifts domestically, businesses are not going to be able to supply that demand immediately. And you’re going to see domestically produced prices go up as well.”
Insiders have warned the North American auto industry could shut down within a week because of the tariffs.
What else will Canada do in response?
Several premiers have announced non-tariff measures, including removing U.S. alcohol from provincially run liquor stores and plans to bar U.S. firms from governments tenders.
Here’s what Ontario Premier Doug Ford said: “Starting Tuesday, we’re removing American products from LCBO shelves. As the only wholesaler of alcohol in the province, LCBO will also remove American products from its catalogue so other Ontario-based restaurants and retailers can’t order or restock U.S. products.”
Nova Scotia Premier Tim Houston announced three immediate measures: “First, Nova Scotia will limit access to provincial procurement for American businesses. We will look for opportunities to cancel existing contracts and will maintain the option to reject bids outright because of President Trump’s unlawful tariffs. Second, the cost of tolls at the Cobequid Pass will double for commercial vehicles from the United States, effective February 3, 2025. Finally, we will direct the Nova Scotia Liquor Corporation to remove all alcohol from the United States from their shelves effective February 4, 2025.”
B.C. Premier Dave Eby also announced that U.S. liquor will be pulled from shelves and that B.C. will exclude U.S. products from government purchases.
Manitoba Premier Wab Kinew wrote on X on Saturday night: “On a personal level, if you want to find ways to fight back, shop local and buy Canadian. Where you spend your money—those are some of the most important decisions that you make.”
What are Canada’s economic options now?
The trade war has served as a wake-up call for Canada, which now faces some dire economic problems given its reliance on the once-reliable United States.
Canada will need to get its economic house in order. That means regulatory reform, cutting internal trade barriers (which are a significant economic drag) and diversifying market opportunities to the EU and Asia-Pacific.
Cutting interprovincial trade barriers, which add between 7.8 and 14.5 percent to the price of goods and services in Canada, could go a long way to offsetting the added costs of tariffs. PPF Fellow Trevor Tombe has estimated that removing inter-provincial trade barriers could give Canada a $1.6-billion boost annually. And the International Monetary Fund estimates that eliminating internal trade barriers could boost Canada’s productivity by 3.8 percent.
Canada could also leverage its significant energy and mining assets to drive growth and investment (this is the focus of the new phase of PPF’s Energy Future Forum). As PPF has noted, there are currently 340 energy and 138 mining projects, with a combined value of $627 billion, that are planned or under construction in Canada. Accelerating these projects could drive economic growth, energy security and cleantech innovation, while meeting growing consumer and industrial energy demand.
On the energy front, the trade war has made clear just how much the energy sector revolves around north-south trade. A big question now is whether Canada can open east-west energy gateways. The Energy East pipeline — proposed in 2013 to take Alberta crude to Canada’s east coast — was deemed too costly and unnecessary at the time.
The idea has been floated again by some premiers, but major cost and regulatory hurdles remain.
“If we want to stop being so reliant on a single trading partner, we’ve got to take down internal trade barriers between Canadian provinces, start looking at how we can do major nation-building projects to our east and west coast,” said Alberta Premier Danielle Smith last month.