Canada has started preparing for potential retaliatory tariffs on U.S. goods following President-elect Donald Trump's recent threats to impose sweeping duties on Canadian imports.

A senior Canadian government official told AP News Wednesday that discussions are underway to target certain U.S. items if Trump follows through on his proposed 25% tariff, although no final decision has been made.

This move comes as Trump renews his hardline stance on trade, calling for punitive tariffs to address what he described as the flow of drugs and migrants across both the northern and southern borders.

Canada has faced a similar situation in the past, such as in 2018 when it imposed billions of dollars in retaliatory duties on U.S. goods after the Trump administration hiked tariffs on Canadian steel and aluminum.

Canadian Dollar Poised For Further Declines

Wall Street analysts expect additional downside in the Canadian dollar – as tracked by the Invesco CurrencyShares Canadian Dollar Trust (NYSE:FXC) – if the tariff threats materialize.

Robert Kavcic, senior economist at BMO Economics, highlighted Canada's vulnerability as a "small, open economy" heavily reliant on U.S. trade.

"The U.S. market accounts for roughly 75% of Canadian goods exports, which in total comprise about 25% of Canadian GDP," Kavcic wrote in a note.

"In general, we'd expect the Canadian dollar to see the biggest and most immediate market impact, extending the weakness seen in recent months. In this event, we see room for further depreciation from recent levels above 1.41 against the dollar."

Shaun Osborne, chief forex strategist at Scotiabank, also expressed skepticism about Canada's ability to quickly address the incoming administration's concerns.

Osborne explained that Trump's newly appointed "border czar," Tom Homan, has already labeled the northern border as "an extreme national security issue," which could complicate negotiations.

"More CAD losses seem inevitable unless the Canadian government can muster a response that satisfies the incoming administration quickly, however. That may not be easy," Osborne warned.

He continued, "The risk of 25% tariffs remains just that at the moment, but the longer the threat lingers and the closer we get to the inauguration, the weaker the CAD may trade."

According to data from the U.S. Census Bureau, U.S. imports from Canada reached $481 billion in 2023, while Canadian imports of U.S. goods amounted to $354 billion during the same period.

In terms of products, Canada's top export to the United States was crude oil and other fuels, totaling approximately $120 billion, followed by vehicles at $58 billion.