As the trade war between Canada and the U.S. intensifies, experts say the Canadian economy will take a hit.
On Monday, U.S. President Donald Trump threatened to raise tariffs on Canadian autos and steel to 50 per cent after Prime Minister Mark Carney suspended trade negotiations last week.
Trump’s auto and steel tariffs would take effect Jan. 1, 2027.
Carney has vowed to impose dollar-for-dollar retaliatory levies following a new round of U.S. tariffs on $28 billion worth of Canadian products that came into effect over the weekend.
Ottawa has not announced which U.S. goods will be tariffed, but has said that the levies will kick in after Labour Day.
Economists surveyed by the Star expect targeted businesses by the Trump administration — including exporters of clothing, furniture and even hockey sticks — to see a significant reduction in demand, with many being forced to lay off workers to survive.
Overall, more economic uncertainty in the absence of a trade deal is also poised to hurt business confidence and investment.
Canada’s unemployment rate could hit 7 per cent
And while experts are not forecasting a recession as a result, they’re not ruling one out either.
“I wouldn’t say that these tariffs yet are enough to push us into recessionary territory,” said Bradley Saunders, economist at Capital Economics. “But, of course, that depends a lot on where we go from here … I think the Trump administration is showing it’s prepared to be aggressive.”
As they stand, the so-called section 338 tariffs apply to only about five per cent of Canada’s exports to the U.S.
Still, as economic activity slows, the national unemployment rate could reach around seven per cent by the end of this year from 6.4 per cent currently, said Randall Bartlett, deputy chief economist at Desjardins, with workers in targeted industries most at risk.
The impact of the 50-per-cent section 338 levies is expected to be uneven across provinces, with Ontario, Quebec and British Columbia taking the biggest hits.
Desjardins also estimates that about 20 per cent of employment in targeted manufacturing industries is exposed to the new U.S. tariffs.
Counter tariffs could push inflation higher
When it comes to inflation, Bartlett said Canada’s retaliatory tariffs are unlikely to have a significant effect immediately on prices for Canadian consumers.
But he added that an escalation in tariffs “could lead to ongoing higher inflation that the Bank of Canada would need to contend with.”
The central bank is dealing with two opposing forces created by the trade war: the downside risks to economic growth versus the upside risks to inflation, said Robert Kavcic, economist at BMO.
“We would expect that the growth impact (of tariffs) ultimately is going to be a lot bigger than the inflation impact,” he said, meaning the bank could decide to cut interest rates rather than raising them in the future.
At the same time, Canadian consumers are still dealing with higher energy prices from the U.S.-Iran war, and Bank of Canada governor Tiff Macklem has warned that policymakers “will not let higher oil prices become persistent inflation.”
