Key Takeaways
- The Canada-US trade war has escalated sharply with announcements of major tariffs to be enacted within days.
- New tariffs could harm Canada’s economic recovery, analysts say.
- Economists don’t see an immediate impact of fresh trade tensions on the Bank of Canada’s rate outlook.
With the United States and Canada seemingly heading to an all-out trade war, the risks to the economy are growing, analysts say. While economists remain hopeful that worst-case scenarios will be averted, the near-term outlook had darkened.
As talks crumbled, the 50% levy US President Donald Trump announced last month on roughly C$28 billion worth of Canadian goods, ranging from hockey sticks to agricultural products, came into effect on Aug. 22. Prime Minister Mark Carney responded by announcing “dollar-for-dollar” retaliatory tariffs beginning Sept. 8. On Monday, Trump threatened to double automobile tariffs (applying to cars, trucks, and auto parts) from 25% to 50% starting Jan. 1, 2027.
“While the share of exports covered is relatively small the impact on the outlook for Canadian growth could be larger than just the direct hit from weaker exports,” UBS economist Abigail Watt wrote. “A ratcheting up in trade tensions with Canada’s largest trade partner could once again bring uncertainty for businesses and consumers.”
In the two days following the news of the trade war escalation, the Morningstar Canada Index rose 0.94% to close at 6,597.47 on Tuesday. For the same period, the S&P/TSX Composite Index edged higher by 0.90% to reach 36,957.63.
“In terms of the overall impact on growth, the combination of tariffs may well have a similar impact to the first year of the trade fight, essentially knocking growth back down close to zero over the next year,” says Douglas Porter, chief economist at BMO Economics. But he says it remains to be seen if all these tariffs actually do come into place and stick.
Trade War Escalation Darkens Canada’s Economic Outlook
The fresh escalation spells strong headwinds for Canada’s economy as it rebounds from a technical recession in the first quarter. “Canada’s proposed ‘dollar-for-dollar’ retaliatory tariffs will further dampen economic growth,” says Tony Stillo, head of Canada economics at Oxford Economics, in a note to investors. “This won’t cause a recession, but greater uncertainty about Canada-US trade policy will weigh on the economy.”
In the immediate future, the fresh 50% duty on select Canadian goods now in effect covers roughly 5% of Canadian exports to the United States. But the exposure rises to as much as 20% of production and employment in some targeted manufacturing industries, says Royce Mendes, managing director and head of macro strategy at Desjardins Capital, in a note to investors. “The result should be a modest drag on headline GDP but acute sectoral pain, particularly for manufacturers in Ontario, Quebec, and British Columbia,” he writes.
Meanwhile, TD Economics senior economist Andrew Hencic forecasts in a note: “growth is now likely to come in closer to the mid-1% [range] by the end of 2027, rather than our earlier estimate of close to 2%.” The economy could suffer greater pain “should tariffs escalate from here.”
Economists Split on Prospects for a Trade Deal
Some analysts remain hopeful that additional tariffs could be reduced or a resolution reached, given the time before they come into effect. However, Ottawa’s counter-tariffs could make it harder to reach a deal. “The retaliation likely makes it a bit more difficult to turn down the temperature,” says BMO’s Porter. That said, the aim of Canada’s retaliation could be to “bring the US back to the table.”
Porter says some of the new US tariffs could remain in place for only a short period. “I suspect that after a spell of escalation that eventually both sides will realize that it’s a negative for both, and will back down,” he says. Still, he adds that there is no guarantee a full-fledged deal would be reached in a reasonable time.
Concerning the Jan. 1 deadline for the new 50% levies on Canadian auto exports, Avery Shenfeld, senior economist at CIBC Economics, says, “the four-month delay in this taking effect is clearly aimed at getting Canada back to the negotiating table, so there is reason to hope that it won’t take effect.”
Tariffs Complicate the Bank of Canada’s Rate Path
Given the expectation that the new tariffs will be temporary, “we don’t expect to see a rate hike until mid-2027,” says CIBC’s Shenfeld.
Meanwhile, the Bank of Canada continues to balance growth against inflation risk stemming from Iran war-linked high energy costs and potentially the counter-tariffs. This dynamic “reduces the likelihood of a hike in the coming months, [while] an underperformance of the labor market with meaningful job losses could trigger a rate cut,” says Charles St-Arnaud, chief economist at Servus Credit Union, in a note.
But the threat of 50% auto tariffs has raised the risk to the economy. That could bring a rate cut, widely ruled out by markets and economists, back into the mix, writes Carlos Capistran, LatAm and Canada economist at BofA Securities, in a note. “A larger-than-expected economic impact, broader tariff coverage, or further escalation could weaken growth enough to make the Bank of Canada cut the policy rate, while a deeper deterioration in the [United States-Mexico-Canada Agreement] outlook would amplify the hit to Canadian and Mexican investment,” he says.
Automotive Industry Exposed to Tariff Risks
Morningstar equity analyst David Whiston says the latest trade escalations made the math a lot worse for Canada. “A lot is still to happen between now and Jan. 1,” he says. “Maybe the two countries will work something out, though probably not in the immediate future.” Following the news of additional auto tariffs, shares of Magna International MGA, the largest Canadian automotive parts manufacturer, fell nearly 8%.
Whiston describes the potential impact on Canada’s automotive industry by citing Ford’s manufacturing plans for Ontario, the nerve center of the domestic automotive industry. The US automaker planned to bring 100,000 units of capacity online in Ontario for making Super Duty pickups later this year. Whiston says a doubling of auto tariffs could mean “more consumer burden, [which] has to be balanced against a consumer already battling inflation elsewhere.”
