Trump's Tariff Shake-Up: What Does It Mean for Canada?

On November 25th, President-elect Donald Trump announced his intention to impose significant tariffs on imports from Canada, Mexico, and China. According to statements made on his Truth Social Network, Trump plans to implement a 25% tariff on all products entering the United States from Canada and Mexico, as well as an additional 10% tariff on goods from China. He indicated that these measures would be enacted through an executive order on his first day in office.

According to the U.S. Bureau of Economic Analysis, Mexico, China, and Canada are the United States' most significant trading partners, collectively accounting for over 40% of the nation's imports last year.

While many analysts highlight the critical role of Canada, Mexico, and China as vital trading partners and caution that imposing tariffs could have far-reaching consequences for American consumers and businesses, Trump has proposed tariffs as a response to border security concerns. He specifically points to issues like illegal migration and drug trafficking, which he claims are facilitated by Canada and Mexico. Trump has emphasized that these tariffs will remain until both countries take decisive actions to curb the flow of drugs, especially fentanyl, and illegal crossings into the United States.

In the context of a potential second term for President Trump, discussions about tariff implementation primarily focus on Section 301 of the Trade Act and Section 232 of the Trade Expansion Act. According to Bloomberg Intelligence, both approaches involve lengthy processes, typically requiring at least six months, leading the market to anticipate that such tariff measures might not take effect until late 2025. However, Trump's assertion that he would impose tariffs immediately upon taking office suggests the potential use of the International Emergency Economic Powers Act (IEEPA). This act allows the president to declare a national emergency and implement tariffs with immediate effect, bypassing the lengthy procedural requirements of other statutes like Section 301.

The 25% tariffs proposed by the Trump administration on Canadian imports are likely to have significant repercussions for Canada's economy and businesses.

▶ GDP Decline

Canada plays a vital role in the supply chain for U.S. companies and consumers, with over 77% of Canadian exports directed to the U.S., and trade making up 60% of Canada's GDP. According to a report by the Canadian Chamber of Commerce, a 10% tariff could result in a $30-billion loss to the Canadian economy.

TD Economics has highlighted that Trump's threat of a 25% tariff poses a significant risk, particularly given the strengthened trade ties since the USMCA's implementation in 2020. A 10% tariff was previously estimated to lead to a 5% decrease in Canadian export volumes and a 2.4 percentage point drop in real GDP over two years compared to baseline projections, potentially causing prolonged economic stagnation through 2025 and 2026.

▶ Job Losses

Ontario Premier Doug Ford has expressed serious concerns on his social media, stating that a 25% tariff "would be devastating to workers and jobs." This concern is echoed by Ian Lee, an Associate Professor at Carleton University, who notes the vulnerability of the Canadian job market, with around two million direct and indirect jobs linked to exports to the U.S. If these tariffs are enacted, many Canadian companies reliant on the U.S. market could face significant challenges, potentially leading to layoffs as they lose access to this critical market.

▶ CAD Depreciation

Following the announcement of potential tariffs, the Canadian dollar fell to a four-year low, trading at approximately 71 U.S. cents on Tuesday morning.

Prior to Trump's announcement, the Canadian dollar was already under pressure due to the Canadian economy lagging behind the U.S. economy, prompting the Bank of Canada to cut interest rates more aggressively than the U.S. Federal Reserve. The prospect of a 25% tariff on Canadian imports has heightened economic risks. If Canada retaliates, it could lead to negative economic growth and further weaken the Canadian dollar, increasing the cost of imported goods, including essential winter imports like fruits and vegetables. Additionally, a larger rate cut by the Bank of Canada in December could accelerate the loonie's depreciation by widening the interest rate gap with the U.S.

Trump's 25% tariff could notably affect several key sectors, as depicted in the diagram below, which highlights Canada's primary export industries to the U.S.. Energy, motor vehicles and consumer goods account for 57% of Canadian exports.

According to the Canadian Chamber of Commerce, while energy products predominantly flow from Canada to the U.S., trade in motor vehicles and parts is relatively balanced. For most manufactured goods—such as chemicals, plastics, rubber, industrial machinery, equipment and parts, as well as electronics and electrical devices—trade between the two countries is largely balanced. The most significant trade imbalances occur in energy products and metal and non-metallic mineral products, as Canada has a substantial comparative advantage in these raw materials due to its abundant natural resource deposits.

The imposition of U.S. tariffs on Canadian goods could have significant impacts on several Canadian companies that heavily rely on the U.S. market.

▶ Energy

▶ Metals

The U.S. tariffs on Canadian metals could significantly impact the aluminum and steel sectors. Citigroup analysts note these metals would be most affected by President-elect Donald Trump's 25% tariff proposal on imports from Canada and Mexico. The U.S. is Canada's largest export market for metals, with aluminum, iron, and steel comprising nearly half of these shipments.

▶ Others

Source: Bloomberg, Morningstar, CBC News, Financial Times, Global News