Trump tariffs could mean recession for Canada next year

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Economists warn the hit to Canada’s economy will be significant if incoming US President Donald Trump follows through on his threat to impose a 25 per cent tariff on all Canadian and Mexican imports when he takes office.

“If this goes through as stated, I think we feel comfortable talking about a recession in 2025,” said Jamie Jane, chief economist at Desjardins Group.

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Trump’s campaign was initially based on imposing a comprehensive 10% tariff on all imports into the United States.

The Canadian Chamber of Commerce published a report in early October, indicating that the impact of such a measure would cost the Canadian economy between 0.9 to one percent of GDP and lead to a loss of $1,100 in real annual income for every Canadian and American.

Late Monday night, after Trump’s announcement, Trevor Tombe, a University of Calgary professor and author of the report, updated his forecast to include the steeper tariffs.

“By updating this to a 25 per cent tariff, I find that the Canadian economy would take a hit to real GDP of 2.6 per cent (annual) or $2,000 per person,” Tombe wrote in a post on X. “Next year will be a recession #cdnecon.”

Statistics Canada estimates that total trade between the United States and Canada will reach $960.8 billion in 2022, with Canadian energy products accounting for a third (33.5 per cent) of the $598.0 billion in exports to the United States.

“About 60 per cent of its (oil) imports come from Canada,” said Pedro Antunes, chief economist at the Conference Board of Canada. “So, that would be very devastating to the U.S. energy sector, to the U.S. refining industry, and to U.S. gasoline prices.”

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Not only would tariffs hamper growth, they could also pose a risk to inflation expectations in Canada, Mexico and the United States.

“If implemented, North American inflation will rise as tariffs pass through on shoppers, businesses and government procurement programs,” Derek Holt, an economist at the Bank of Nova Scotia, wrote in a note to clients. “The effects of the first round of these tariffs will likely mean less monetary easing by the Federal Reserve, Bank of Canada and Bank of Mexico due to inflation concerns.”

Antunes says Canada’s energy and agriculture sector will be able to recover after an initial hit by finding other export markets for its products, but the proposed tariffs would devastate Canada’s auto manufacturing industry.

“I think a 25 percent tariff would shut down the auto industry in this country if it were implemented and were permanent,” Antonis said. “I’m sure the U.S. auto sector would be in a state of panic about this type of tariff, because much of our auto sector and other manufacturing industries are highly integrated across borders.”

Jain argues that even if this latest tariff threat is a negotiating tactic by Trump to get Canada to do more on Canada-US border security, discussion of potential tariffs will still have a significant impact on investment sentiment in Canada.

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“I think we will see investment plans, perhaps expansion, and projects that were scheduled to be postponed or stopped completely, and that will have a good impact on our investments,” Jan said.

Canadian business groups reacted Monday, noting the harmful impact tariffs could have on economic competitiveness on both sides of the border.

“President-elect Trump has made clear that he wants America’s manufacturing sector to grow and thrive,” said Dennis Darby, president and CEO of Canadian Manufacturers and Exporters. “These tariffs will have the opposite effect.”

Dan Kelly, president of the Canadian Federation of Independent Business, warned that uncertainty will hurt the economic recovery of small businesses.

“Small and medium-sized enterprises account for about 40 percent of exports to the United States,” he said in a statement. “Canada cannot dismiss this as an idle threat or initial positioning – we need to take this seriously and present, once again, a united front in responding to this challenge.”

• Email: jgowling@postmedia.com

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