If U.S. president-elect Donald Trump lives up to his word and imposes a 25 per cent tariff on all imports from Canada, it would have a catastrophic impact on both sides of the border, throw an already-sputtering Canadian economy into a recession, and put the long-term future of the auto industry in this country into question, economists and trade experts say.
The two countries’ economies are so intertwined — particularly in the manufacturing and energy sectors — that hitting Canada would also have a heavy impact on the U.S., argued Pedro Antunes, chief economist at the Conference Board of Canada.
“This will be devastating for the Canadian economy, and devastating for the U.S. economy as well,” said Antunes.
While manufacturers aren’t likely to shut down Canadian production or shift plants to the U.S. immediately, in the longer-term, they’ll likely be taking a hard look at whether they want to risk access to American consumers.
“We’re going to see a deterioration of our attractiveness as an investment destination, because a lot of it is based on our access to the American economy,” said Antunes. “I think this could shut down the automotive industry in Canada.”
The first impact American consumers would be likely to face is increased prices at the gas pump — particularly in the Midwest, where Canadian crude oil keeps refineries going at full-tilt, said Antunes.
“There’d be an almost immediate impact on gasoline prices in the U.S., because they import a lot of Canadian crude. And we know how sensitive consumers in Canada and U.S. are to gasoline prices,” said Antunes.
If the tariffs are 25 per cent across the board on all Canadian imports, the Canadian economy would shrink by 2.6 per cent, University of Calgary economist Trevor Tombe estimated.
“And that’s just the straight impact of the tariffs, without any of the knock-on effects, or uncertainty, so it’s almost surely an underestimate,” said Tombe. “That’s basically a recession. The typical retraction is about three per cent in a recession.”
Earlier this year, Tombe had prepared a tariff impact paper for the Canadian Chamber of Commerce, based on 10 per cent tariffs. After updating the numbers hastily following Trump’s Monday evening announcement on his Truth Social site, he found the potential impact to be even more grim. That 2.6 per cent drop in economic output translates into an annual loss of $78 billion for the Canadian economy, Tombe estimated.
Tombe added that the tariffs would cause significant job losses, particularly in the hardest-hit sectors.
“No question, there will be job losses. The tariff will result in reduced output in these heavily affected sectors, and with less production, they’re naturally going to lay off workers,” said Tombe.
The U.S. market accounted for roughly 75 per cent of Canadian exports, a BMO report from economist Robert Kavcic found, making up about a quarter of Canada’s GDP. Canada sent $173 billion to the U.S. in energy exports alone last year, Kavcic’s report found, and tariffs would mean an immediate impact of higher oil and consumer gas prices in the U.S.
The higher prices on goods from Canada flowing into the U.S. could depress demand for them, which could drag down an already shaky Canadian economy, Kavcic added.
For the manufacturing sector, the impact of a full 25 per cent tariff would be devastating, warned Dennis Darby, CEO of Canadian Manufacturers and Exporters.
While it might not happen in exactly the form Trump has threatened, Darby said Canada can’t afford to take the sabre-rattling lightly.
“When the incoming president says he’s going to do that on Day 1, you have to take that as credible,” said Darby.
In the auto sector, supply chains are so intertwined across the border that it’s hard to believe Trump would implement tariffs across the board, argued Flavio Volpe, CEO of the Automotive Parts Manufacturers’ Association.
“It would be like taking a sledgehammer to his own foot,” said Volpe, who estimated that roughly half of the parts going into Canadian-made cars are sourced from U.S. producers.
“We’re so integrated in the automotive industry. So there’s no way to separate the American interests from the Canadian interests here,” said Volpe.
While acknowledging that Trump isn’t immune from cutting off his nose to spite his face, his first term in office shows at least some glimmer of hope for rational economic action — at least eventually, Volpe added.
“He did put a national security tariff on aluminum from Quebec that U.S. defence interests need. So for a while, he taxed his own military to make a point. But I’ll remind everybody that that was also a short-term point. And that we have leverage,” said Volpe.
That leverage, says Volpe, comes from desperately needed Canadian critical minerals and energy resources such as oil and gas. Both of those, said Volpe, would help the U.S. loosen its trade ties with China.
“You need independence from the Chinese sphere. And that comes from the resources we have in this country,” said Volpe. “We’ll be inside the tent by the time it’s all said and done, if we put in our best efforts to demonstrate that their best interests extend to this side of the border.”
Laura Dawson, executive director of the Future Borders Coalition, doesn’t expect the tariffs to hit across the board.
“I feel pretty confident that Canada can negotiate its way out of many of these tariffs because, for example, the U.S. imposing a tariff on Canadian oil and gas will have an immediate effect on U.S. consumers,” Dawson said.
“What we know from Trump 1.0 is he does what he says. If he has a plan, he usually acts on it, but he doesn’t act on it with the magnitude that he could.”
The worst case could see tit-for-tat retaliatory tariffs, a stalemate and the same politics that led to the Great Depression, Dawson warned.
With files from Tonda MacCharles
