Trump tariffs could mean recession for Canada next year

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Economists are warning the hit to Canada’s economy will be significant if incoming U.S. president Donald Trump makes good on his threat of imposing a 25 per cent tariff on all Canadian and Mexican imports when he takes office.

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“If this passes as stated, I think we’re comfortable talking about a recession in 2025,” said Jimmy Jean, chief economist with Desjardins Group.

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Trump initially campaigned on imposing a 10 per cent across-the-board tariff on all imports coming into the United States.

The Canadian Chamber of Commerce published a report in early October, noting the impact from such a measure would cost the Canadian economy 0.9 to one per cent of GDP and lead to a loss of $1,100 in real annual income for each Canadian and American.

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

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

Statistics Canada estimates total trade between the United States and Canada amounted to $960.8 billion in 2022, with Canadian energy products making up one-third (33.5 per cent) of the $598.0 billion worth of exports to the U.S.

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

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Not only will the tariffs put a drag on growth but could also pose a risk to the inflation outlooks for Canada, Mexico and the U.S.

“If executed, North American inflation will rise as tariffs are passed onto shoppers and businesses and government procurement programs,” wrote Derek Holt, economist with the Bank of Nova Scotia, in a note to clients. “First round effects of such tariffs are likely to mean less monetary easing by the Federal Reserve, Bank of Canada and Bank of Mexico on the inflation fears.”

Antunes argues that Canada’s energy and agriculture sector would be able to recover after taking an initial hit, by finding other export markets for its products, but the proposed tariff would doom Canada’s auto manufacturing industry.

“A 25 per cent tariff, I think, would shut down the auto industry in this country if it were to apply and be permanent,” said Antunes. “I’m sure the auto sector in the U.S. will be in a panic over this kind of tariff, because so much of our auto sector and other manufacturing is very much integrated across the borders.”

Jean argues even if this latest tariff threat is a negotiation tactic on the part of Trump to get Canada do more on Canada-U.S. border security, the discussion of potential tariffs will still have a significant impact on investment sentiment for Canada.

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“I think we’ll see investment plans, maybe expansion, projects that were planned being put on hold or stopped altogether, and that would have a decent hit on our investment,” said Jean.

Canadian business groups reacted on Monday, pointing to the detrimental effect tariffs would have on economic competitiveness on both sides of the border.

“President-elect Trump has made it clear that he wants U.S. manufacturing to grow and thrive,” said Dennis Darby, president and chief executive at Canadian Manufacturers and Exporters. “These tariffs would have the opposite effect.”

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

“Small and medium-sized businesses account for approximately 40 per cent of exports to the U.S.” he said in a statement. “Canada cannot afford to 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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