The new U.S. administration is contemplating wide-ranging import tariffs, which could massively knock the Canadian and U.S. economies off kilter.
President Donald Trump has imposed a 25 percent tariff on goods from Canada and Mexico, and tariffs on imports from other countries. Such actions could prompt retaliatory steps from trading partners.
Tariffs are like taxes on imports and increase costs for consumers and businesses — affecting trade, jobs, GDP and inflation. Their impact depends on how many alternatives are available — when substitutes are hard to come by, tariffs will push up inflation and economic disruption.
Tariffs at a minimum lead to a one-time price increase. Whether they lead to ongoing inflation depends on consumer and business expectations. If inflation expectations are anchored, then the impact on overall prices and wages will be limited.
Trump Revives 2019 Tariff Justification Amid Legal Doubts
Under Section 232 of the Trade Expansion Act, the White House said Trump is issuing a 25% tariff on imported cars and parts, saying that it’s necessary to protect national security.
However, Georgetown Law professor Jennifer Hillman questions the legal basis. She notes that Trump first ordered a Section 232 review in 2019, which found imports harmed U.S. security. But since he missed the 105-day deadline to act then, a new report is needed. Instead, the White House is relying on the 2019 findings.
Trump’s proclamation claims the decline in U.S. auto production threatens national security and that trade agreements like USMCA haven’t improved the situation.
Hillman, who opposes Trump’s tariff hikes, argues they hurt the U.S. economy and disproportionately impact lower- and middle-income consumers.
How Tariffs Are Affecting Canadian Businesses
In the short run, any Canadian business that is the Importer of Record for goods is already experiencing the effects of the U.S. tariffs and the Canadian surtax. In particular, the tariffs don’t only hurt the importer, they also at some point hurt the exporter as well. For the current trade war between the U.S. and Canada, we expect Canadian businesses to feel the following effects:
Increased Costs of Exporting Goods and Reduced Competitiveness
U.S. Tariffs inflate the cost of Canadian goods within the American market, making them less competitive against domestic products or foreign goods whose countries aren’t slapped with the same tariffs. The result can be a decline in demand for Canadian exports and loss of market share to competitors. Simultaneously, due to the imposition of the Canadian surtax, for Canadian enterprises importing American goods, the cost of American products within the Canadian market will also increase. The net effect of these changes will be a negative impact on Canadian business revenue streams.
Supply Chain Disruptions
Tariffs can also disrupt supply chains, especially for industries that depend on cross-border trade for raw materials or components. As companies adjust to reduce the impact of tariffs, costs may go up and logistics may become more complex to find new markets or suppliers. This can potentially cause delays, operational inefficiencies and additional costs.
Market Diversification
To counteract tariffs from the U.S., Canadian industries could move away from the U.S. as their primary market. Although this strategy can help avoid risk, it frequently requires massive investments in marketing, establishing new commercial relationships, and examining different regulatory environments. Diversification is a long-term solution, but it can also be especially critical in times of uncertainty when not every business can allocate time and resources to it.
The Hidden Costs of Tariffs
The Trump administration believes tariffs will bring in more revenue for the federal government, but my research suggests the economic drawbacks could outweigh any benefits.
Tariffs don’t just impact the countries that are being targeted—they also hurt domestic consumers by raising prices and limiting choices. U.S. businesses involved in marketing, distribution, and sales also feel the pinch when imports decrease.
Trade isn’t as simple as “exports are good, imports are bad.” Studies show that tariffs lead to higher prices, fewer options, and disruptions throughout the economy. Policymakers need to consider these consequences carefully to avoid serious long-term economic issues.
Impact on Different Sectors
The effects of U.S. tariffs on Canadian prices will vary by industry depending on the degree to which each is dependent on U.S. trade.
Industries that rely heavily on the U.S. market, such as agriculture, manufacturing and energy, are likely to be the hardest hit. In short, if tariffs make certain products less attractive, Canadian producers will be hard-pressed to replace lost demand in the short term. Canada’s biggest exports to the U.S.—energy products and motor vehicles—are likely to be the most affected. The United States also imports significant amounts of wood, paper, and cereals from Canada, accounting for 86 to 96 percent of these goods (World Integrated Trade Solution). Agriculture and forestry will also face challenges. Importantly, crude oil is Canada’s top energy export, with 90 percent heading south. Exports generated US$143 billion in 2023, and since crude oil is vital to the Canadian economy, Trump’s proposed 10% tariff on it is a significant concern.
Canada’s Retaliatory Measures
Canada will retaliate against U.S. tariffs imposed by the Trump administration, Prime Minister Justin Trudeau and leaders of the provinces have planned and even hinted at.
Trudeau announced that Canada will immediately impose retaliatory tariffs on C$30 billion ($20.8 billion) worth of U.S. goods. These tariffs will remain in place until the U.S. lifts their tariffs on Canadian goods. The measures are expected to cover a wide range of goods, spanning food, appliances, clothing and electronics.
Details of Canada’s Plan
First Phase: Canada will put a 25% tariff on C$30 billion of goods imported from the U.S. — 1,256 products ranging from orange juice, peanut butter, wine, beer, appliances and apparel. Other key imports are cosmetics (C$3.5 billion), appliances (C$3.4 billion), pulp and paper (C$3 billion) and plastic products (C$1.8 billion).
Second Phase: Soon, there is expected to be a 21-day consultation period (as of time of writing) in which Canada plans to escalate by moving to impose tariffs on an additional C$125 billion worth of U.S. goods. Those that could be affected are passenger vehicles, electric vehicles, steel, aluminum and agricultural products such as beef, pork and dairy.
Non-Tariff Measures: Trudeau also suggested that Canada could seek non-tariff measures, such as imposing tariffs on the exports of critical minerals or altering energy procurement. Several provinces have begun to take action, with Ontario mandating that government contracts be off-limits to U.S.-based companies as well as canceling a C$100 million agreement with Elon Musk’s Starlink.
Provincial Action: Ontario, which accounts for more than a third of Canada’s GDP, said it would impose a 25 percent surcharge on electricity exports to New York, Michigan and Minnesota if the tariffs remained in place. Nova Scotia to raise tolls for some vehicles from U.S.
Canada’s moves reflect the escalating friction between the two countries and uncertainty over their continued trade clash.
Bank of Canada Cuts Interest Rate Amid Trade Tensions
The Bank of Canada grew concerned about inflation and weaker growth due to trade uncertainty and U.S. tariffs, and on March 12 it cut its key interest rate by 25 basis points to 2.75%.
The bank is not rushing to make further rate changes, balancing higher costs with sluggish demand. Tariffs, including a 25 percent U.S. levy on steel and aluminum, have shaken Canadian businesses and lowered investment. Canada retaliated with C$29.8 billion of tariffs on U.S. goods.
The bank cautioned that continuing trade frictions could dampen growth and raise prices, making it more difficult to decide whether to raise rates further. Inflation is meanwhile expected to hit 2.5% in March.
The Canadian dollar rose marginally after the decision. Markets are pricing in a 45% likelihood of another cut in April.
Public Sentiment and Consumer Behavior
With continued escalation of trade tensions between Canada and the U.S., Canadian consumers have reacted strongly to tariffs added to goods. A Numerator report says shopper sentiment in Canada is a mix of exasperation and resilience, as consumers adjust to a shifting economy.
Rising Nationalism and the ‘Buy Canadian’ Movement
One of those trends is more Canadian nationalism. Tariffs are raising the price of U.S. goods, which is having an effect on buying habits among consumers in Canada. The idea of this "Buy Canadian" movement has been gaining traction, as consumers become increasingly aware of how these economic tactics affect pricing and they’re encouraged to help stimulate local industries. This heightened demand for made-in-Canada goods underscores a desire to depend less on goods imported from the United States and foster Canadian job security.
Boycotts and Preferences for Local Goods
Beyond buying Canadian products, some Canadians have actively boycotted U.S. goods altogether, contributing to the "Buy Canadian" movement. The change in consumer habits has affected industries, and some companies have reported better sales of homegrown products. Yet that trend toward nationalism brings its own set of challenges, as some consumers in Canada have found it hard to completely avoid goods and services from the United States.
Future Outlook for Canada-U.S. Trade Relations
The future of Canada-U.S. trade remains uncertain, with tariffs still in place, but both countries have powerful incentives to keep the economic relationship intact. Ongoing trade negotiations will therefore be paramount to relieving tensions, but also establishing a stable framework for mutual benefit for both these nations moving forward.
Ongoing Negotiations and Adjustments
Despite the tightening pressures from tariffs, Canada and the U.S. have likely not closed the door yet to discussions to ease the pressures in sector such as energy, agriculture and automotive. Agreements that should reduce barriers and facilitate market access will be vital to avoid lasting disruptions.
Diversification and New Trade Partnerships
In response to uncertainty, Canada is diversifying its trade by tightening ties with Europe and the Asia-Pacific. Arranging deals like CETA and CPTPP opens new markets and mitigates reliance on the U.S.
Shifting Trade Agreements
Future trade deals must contend with a new world economy. The U.S. can —and in these situations, often does —recalibrate its system and changes terms if it feels they need updating —and Canada, as the largest trading partner with the most to lose, will challenge what it perceives as unfair assumptions in the original provisions. The outcome of these negotiations will determine Canada-U. S. trade.
Final Thoughts
The tariff spat between the U.S. and Canada has reared up into economic headaches for both neighbors, with significant repercussions seen throughout many sectors of the economy and shaping public opinion. From retaliatory tariffs to changing consumer behavior, the economic fallout is pervasive, affecting everything from gross domestic product growth to inflation.
Despite these tensions, optimism persists for a resolution through ongoing dialogue and strategic realignment. The future of Canada-U.S. trade will hinge on the two countries’ responses to these challenges, with a focus on cooperation, diversification, and trade flexibility. Looking ahead, it is evident that these changes will need to be addressed to maintain economic continuity and health in both countries and ensure their long and storied relationship can weather the winds of change.
