Proposed 25% Tariffs Could Trigger Economic Shockwaves Across Canada
If U.S. President-elect Donald Trump follows through on his pledge to impose sweeping tariffs on Canadian exports, the energy and automotive industries are projected to suffer the most significant impacts, according to economic analysis.
Energy: Canada’s Largest Export
The energy sector, encompassing oil and gas, is Canada’s largest export to the United States, accounting for nearly $85 billion in the first half of 2024 alone—a figure approaching $170 billion annually. A 25% tariff on energy products would drastically reduce the competitiveness of Canadian exports, potentially resulting in billions of dollars in losses for the industry.
Automotive Industry: Second Hardest Hit
The automotive industry, which includes motor vehicles and parts, is the second-largest export sector, generating nearly $40 billion in trade with the U.S. in the first half of 2024. Tariffs could lead to reduced exports, disrupted supply chains, and higher costs for manufacturers and consumers.
Other Vulnerable Sectors
Economic modeling by Trevor Tombe, a University of Calgary economics professor, highlights additional industries that would face significant challenges under Trump’s tariffs:
- Basic metals: 9% reduction in exports.
- Chemicals: 8% reduction in exports.
- Paper products: 7% reduction in exports.
Impact on Trade Flow and Productivity
Tombe’s analysis predicts that a 10% tariff across all sectors would reduce U.S. exports as a share of output in affected Canadian sectors by 22 percentage points. In the automotive and transport equipment sectors alone, this decline would be 10 percentage points.
If tariffs escalate to 25%, the impacts would be even more severe, with potential knock-on effects from retaliatory tariffs imposed by other countries.
Economic Consequences on Both Sides
The interconnected economies of Canada and the U.S. mean significant repercussions for both nations.
- In Canada, real incomes could decline by 1.5%, while labour productivity may fall by 1.6%, translating to nearly $1,100 CAD per person in annual losses.
- In the U.S., real incomes and productivity would decline by about 1%, amounting to $800 USD per person annually.
A “Lose-Lose” Scenario
Business leaders and policymakers have called the proposed tariffs a “lose-lose” scenario, urging collaboration to avoid severe economic disruptions. Both countries stand to lose significantly if retaliatory measures are triggered, compounding the negative effects on trade and income.
Next Steps
Canadian officials, including federal leaders and provincial premiers, have convened emergency meetings to address the potential fallout. While the future of Trump’s tariffs remains uncertain, industries and governments are preparing for possible economic turbulence in the months ahead.