The trade tensions between the US and Canada have been escalating, and many are wondering if President Trump will impose tariffs on Canada. The US has already imposed tariffs on Canadian steel and aluminum, citing national security concerns.
The tariffs have had a significant impact on Canada's economy, with the country's steel and aluminum industries being hit particularly hard. Canadian steel and aluminum exports to the US have decreased by 20% since the tariffs were imposed.
President Trump has been critical of Canada's trade practices, including its dairy and lumber industries. He has threatened to impose tariffs on these industries if Canada does not agree to new trade terms.
On a similar theme: Trump Steel Tariff 2018
Canada's Tariff Response
Canada will drop its counter-tariffs on some American goods in the coming days, a move meant to "match" how the White House treated Canadian goods.
Mark Carney announced this change one day after speaking on the phone with Donald Trump, and it will go into effect on 1 September. Levies on steel, aluminum, and autos will remain in place.
85% of Canada's trade with the US is tariff-free, Carney said, despite the global turmoil and American tariffs on Canadian goods.
Canada has imposed retaliatory tariffs on US goods three times, covering $60 billion worth of consumer goods, in response to Trump's aggressive tariff plans.
The Canadian government has also imposed tariffs on American-made cars, and the governing Liberal party has pledged government support for sectors disproportionately affected by American economic protectionism.
Discover more: Trump Grants One-month Tariff Exemption to Us Automakers
Impact on Canada
Canada is facing significant economic implications due to the proposed 10% tariff on all Canadian goods and services exports. This could lead to a near-5% reduction in Canadian export volumes to the U.S. by 2027.
The auto sector is expected to face the deepest negative impacts, with the automotive supply chain being one of the most integrated and hardest to diversify away from. Almost 20% of intermediary goods inputs in this sector are sourced from the U.S. alone.
The energy sector, chemical/plastic/rubbers manufacturing, forestry products, and machinery also have outsized exposure to the U.S. market. This could lead to significant economic strain on these industries.
Canada retaliating with tariffs on all U.S. imports of a similar magnitude could increase costs for domestic producers and push import volumes lower. This would further exacerbate the economic impact on these industries.
The Bank of Canada (BoC) may be forced into additional interest rate easing to the tune of 50–75 basis points, widening the spread to U.S. rates and putting downward pressure on the Canadian dollar.
Trade Insights
Trade between Canada, the U.S., and Mexico has been thriving, with total exports between the three countries topping $1.5 trillion last year, a 30% increase from 2019 levels.
Canada and Mexico have become the U.S.' largest import partners, with over 75% of Canadian exports destined for the U.S., a share not seen since 2006. This has led to a healthy goods trade surplus for Canada, mainly driven by energy exports.
Over 30 U.S. states have Canada as their number one export destination, with Canadian energy exports accounting for almost a third of its total merchandise exports.
Additional reading: Trump Grants One-month Tariff Reprieve to Mexico
Trade Linkages Matter
Trade linkages between Canada, the U.S., and Mexico are vital, with total exports between the three countries topping $1.5 trillion last year.
The passage of the USMCA in 2020 has propelled Canada and Mexico to the top spots on the U.S.'s largest import partners list, amid growing U.S.-China trade tensions.
Over 75% of Canadian exports are currently destined for the U.S., a share that was last seen in 2006, highlighting the importance of the trade relationship.
Canadian energy exports to the U.S. have led the way, accounting for almost a third of its total merchandise exports, and jump to almost 50% when auto exports are included.
Canada also enjoys a healthy goods trade surplus with the U.S. at over 7% of GDP, mainly led by energy exports.
Mexico's surplus with the U.S. currently stands at an elevated 17% of GDP, with its share of U.S. imports rising steadily from 13% in 2016 to over 15% last year.
The small surplus in exports outside of energy has also been on the rise since the implementation of the USMCA, showing a positive trend in the trade relationship.
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Model Limitations
Canadian companies would likely adapt to tariffs by sourcing or developing new supply chains, which would lessen the impacts.
One key shortcoming of models is that they tend to underestimate the effect of these behavioural adjustments.
In the face of tariffs, consumers would substitute products where possible, which would also help mitigate the impacts.
The extent to which firms absorb the hit to margins and substitutes are readily available will go a long way in determining the final toll on real household incomes.
Canada's high degree of openness would allow for some level of import and export diversification, helping to cushion the blow.
Trading partners like Mexico, the EU, and Japan will be key in this scenario.
Canada's retaliation strategy would likely be targeted and strategic, rather than broadly applied to all U.S. exports.
Canada would likely first opt for a resolution to carve out an exemption from tariffs altogether.
USMCA and Tariffs
The USMCA (United States-Mexico-Canada Agreement) has been a key point of contention in the trade war between the US and Canada. Canada's participation in the agreement has been a major factor in the country's efforts to avoid tariffs.
Canada has imposed retaliatory tariffs on US goods three times, covering $60 billion worth of consumer goods. The tariffs were imposed in response to the US's aggressive tariff plans, which sparked a trade war earlier this year.
The USMCA review in 2026 may be a turning point in the trade war, as the US administration may seek concessions from Canada. The US has already indicated that they would re-open the USMCA agreement if elected.
The US is likely to focus on high-priority areas, including dairy and poultry imports, which are currently protected by Canada's Supply Management System. This system uses production quotas and import tariffs to protect the industry.
Here are some key industries that would be affected by tariffs:
- Auto sector: The automotive supply chain is highly integrated and would face significant negative impacts from tariffs.
- Energy sector: The energy sector would also be heavily impacted by tariffs, as 50% of its exports end up in the US.
- Chemical/plastic/rubbers manufacturing: This industry has outsized exposure to the US market, making it vulnerable to tariffs.
- Forestry products: The forestry products industry would also be affected by tariffs, as 25% of its exports end up in the US.
- Machinery: The machinery industry would also face negative impacts from tariffs, as 25% of its exports end up in the US.
Overall, the USMCA review in 2026 may be a critical moment in the trade war between the US and Canada.
Trade with Other Countries
Tariffs imposed by the US on Canadian goods have led to a significant increase in trade tensions between the two countries.
Canada's retaliatory tariffs have targeted US goods worth over $12 billion, including steel, aluminum, and agricultural products.
The US has a large trade deficit with Canada, with imports from Canada exceeding exports by $8.4 billion in 2018.
Canada is the US's second-largest trading partner, accounting for 18% of US trade.
The US has imposed tariffs on Canadian lumber, which has led to a 35% decline in US lumber imports from Canada.
Canada has also imposed tariffs on US whiskey, which has led to a 20% decline in US whiskey exports to Canada.
For another approach, see: Trump Lumber Tariffs 2025
Canada's Agricultural Sector
Canada's agricultural sector has a unique system in place, particularly for dairy and poultry farmers. The country implemented a Supply Management System in the 1970s, which uses production quotas and import tariffs to protect the industry. Canada made a commitment to enhance market access to the US under the original USMCA, but the US has consistently alleged that Canada is improperly implementing this commitment. The US is likely to revisit this issue in future negotiations. The dairy and poultry industry in Canada is relatively small in terms of its contribution to total trade.
Curious to learn more? Check out: Trump Dairy Tariff
Summary and Conclusion
We don't expect a drastic change in US tariffs on Canadian exports if the former President takes office, as cooler minds are likely to prevail. This is due to the importance of Canadian trade to the US economy.
The US and Canada have a significant trade relationship, which was further strengthened by Trump's signing of the USMCA during his first term.
While reaching a renewed USMCA deal won't be easy, it's essential to consider the economic benefits of maintaining a strong trade relationship between the two countries.
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