With $3.6 billion crossing the U.S.-Canada border daily, the economic ties between the two nations run deep. But these ties are now in jeopardy. In a recent announcement, President-elect Donald Trump has pledged to impose a sweeping 25 per cent tariff on all goods from Canada and Mexico, effective his first day back in the White House. This bold move aims to pressure neighboring countries to intensify efforts against migration and drug trafficking, while advancing the "Buy American" agenda to strengthen the U.S. economy. If successful, it could fundamentally reshape North America’s economic landscape.
As speculation swirls and rumors spread, one question stands out: What’s really at stake for Canada? Ivey Professor of General Management and International Business, Andreas Schotter unpacks this and more in Impact’s "Ask the Experts."
What are the economic implications for Canada if a 25 per cent tariff in the U.S. takes effect?
The numbers are stark. A 10 per cent tariff scenario would trigger an estimated 2.4 percentage point contraction in the Canadian GDP over two years, putting approximately 500,000 jobs across various sectors at risk. The U.S. would face a one percentage point GDP reduction and a $3.5 to 4 trillion deficit increase. More alarming is the 25 per cent scenario, which could triple the job losses to 1.5 million positions for Canada, also causing severe supply chain disruption, permanent structural changes, and a GDP contraction significantly exceeding 2.4 per cent. This would require aggressive monetary policy intervention, which in turn will put higher inflation on Canadians.
What industries are most vulnerable to the tariff’s impact?
Industries heavily reliant on cross-border supply chains would be hit hardest. The automotive sector especially, with 20 per cent of its inputs sourced across borders, faces significant cost increases and disruptions. The energy sector, chemical and plastic manufacturing, forestry products, and machinery sectors are also highly vulnerable.
Would imposing this tariff comply with the rules of the United States-Mexico-Canada Agreement (USMCA)?
No, the imposition of a sweeping 25% tariff would likely violate USMCA provisions, which are designed to ensure free trade among member countries. Any unilateral tariff would require justification under narrow exceptions, such as national security, which would likely face legal challenges from Canada and Mexico. However, with 2026 fast approaching, it’s possible that Trump will issue a threat that if no changes are made beforehand, a new deal will be off the table in 2026, effectively cancelling the USMCA.
How might the tariff affect Canadian consumers?
Canadian consumers would face substantial challenges if the tariff were introduced. Firstly, prices on a wide range of goods are likely to rise significantly. For example, a loaf of bread currently priced at $3.50 could rise to $5 due to increased costs for imported processed agricultural inputs. These steep – and sweeping – price hikes will strain household budgets and increase debt levels. Energy costs would also see an increase, which will only compound financial pressures. Finally, disruptions in supply chains and market exits could not only leave Canadians with fewer options in various categories but also limit access to essential products, like prescription medications or household goods reliant on US components.
Conversely, will the tariff bring tangible benefits to American consumers?
The tariff is unlikely to significantly benefit American consumers. Instead, it would lead to higher prices for goods reliant on Canadian imports, such as lumber for construction and automotive parts, increasing the costs of housing and vehicles. Reduced competition might also further exacerbate price inflation in certain categories.
Can the proposed tariff truly support domestic manufacturing and protect U.S. industries, as President-elect Donald Trump claims?
While the tariff could encourage some domestic manufacturing, by increasing the costs of imported goods it risks disrupting established supply chains, raising operational costs, and reducing overall efficiency. These factors might offset any benefits to U.S. industries, ultimately diminishing their global competitiveness.
What strategies can Canadian businesses adopt now to shield themselves from the effects of the tariff?
Canadian companies need to move quickly to protect their operations if the proposed tariffs take effect. Start with a thorough supply chain assessment to identify risks and prepare for potential disruptions. Plan for both 10 per cent and 25 per cent tariff scenarios to stay agile, build at least six months of cash reserves, and review existing contracts to renegotiate tariff provisions and limit financial exposure.
Beyond these immediate defenses, companies should focus on strategic transformation. Reducing cross-border dependencies with vertical integration and building strong domestic supplier networks can ensure long-term stability. Embracing digital tools and advanced inventory management, like AI, can also boost competitiveness and efficiency. Lastly, pursuing strategic partnerships or mergers can provide the scale and strength needed to thrive in what will be a very challenging economic climate.
What should Canadian policymakers prioritize to protect the nation’s financial resilience and maintain its global competitiveness?
Canadian policymakers must move beyond incremental approaches to embrace bold, transformative policies. This includes launching a $5B+ Strategic Industries Fund, fast-tracking approvals for critical manufacturing projects, and reforming the Competition Act to allow strategic domestic consolidation, and explicitly creating incentives for—what we call “zero-weight exports”—essentially doubling down on non-physical digital and service exports. Additionally, a dedicated Trade Agreement Implementation Task Force, which includes private sector leadership, must be established to make existing trade agreements more accessible and practical for businesses of all sizes. Finally, enabling increased access to education and allowing educational institutions to innovate in stackable degree programs, dual-degrees, and hybrid “while you work.”
Do you believe the tariff will be enforced, or is it simply a strategy to intimidate?
Despite the rhetoric, broad tariffs are unlikely to come to fruition. Instead, these threats are likely being used as a bargaining tool to influence the renegotiation of the USMCA, scheduled for 2026.
Historically, similar tariff threats have often been used as negotiating tactics rather than being implemented in their entirety. For example, during the 1971 "Nixon Shocks," the U.S. imposed a temporary import surcharge, which caused significant economic strain but was ultimately lifted after renegotiations with trading partners. Similarly, the Smoot-Hawley Tariff Act of 1930, initially intended to protect American agriculture, was scaled back in practical effect over time due to international retaliation and economic fallout.
These instances demonstrate how sweeping initial threats often give way to more targeted and limited measures once the political and economic consequences become clear. This pattern suggests that the proposed 25 per cent tariff may be leveraged to achieve specific political or economic concessions, rather than being fully enforced in its broadest form. That said, and as history has shown time and time again, predicting the actions of the Trump administration remains a challenge.
