‘Rolling tariff threats’ to rock Canada’s economy

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U.S. President Donald Trump may have paused tariffs, but Canada’s economy is going to be rocked by “rolling tariff threats” for some time to come, warn economists.

Trump has made it clear he wants a broader agreement on trade, but given the political upheaval now under way in Canada, economists with Capital Economics doubt whether this can be reached before beginning of March, the deadline the president has set before imposing a 25-per-cent tariff on Canadian goods.

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This raises the risk that Canada will face “rolling tariff threats” for the foreseeable future that will weigh on business investment even if the threat never becomes reality, said Stephen Brown, deputy chief North America economist.

Capital is not convinced drug and illegal alien issues on the border are Trump’s sole concern, noting that in a recent social media post the president said tariffs will be paused “to see whether or not a final Economic deal with Canada can be structured.”

“If he is looking for wholesale changes to the economic relationship between Canada and the U.S. that might result in a narrowing of [the trade] deficit, then it is very unlikely that a deal can be achieved in the next 30 days given the current political climate,” said Brown.

Prime Minister Justin Trudeau is about to be replaced and there is the possibility his Liberal government is voted out if an early election is triggered after Parliament returns in late March.

If Trump’s goal is to push forward the review of the North American free trade agreement USMCA, now due in 2026, negotiations could stretch for a full year. The last NAFTA renegotiations during Trump’s first term took that long.

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“So even if the review started very soon – which, again, seems extremely unlikely – a relatively positive outcome for Canada might still be a full year during which the threat of 25 per cent tariffs is hanging over the economy,” said Brown.

Because of this uncertainty, Capital is cutting its forecast for Canada’s average annual GDP growth to 1.5 per cent this year, from 1.8 per cent.

“For now, we will keep our forecast for 2026 at 1.5 per cent, but both our 2025 and 2026 forecasts will be cut substantially if the U.S. eventually imposes 25 per cent tariffs,” he said.

The last time Canada went through this in the 2017-2018 NAFTA talks, there was no obvious sign that business investment suffered, said Brown. This time the stakes are much higher.

If Trump had withdrawn from NAFTA back then, Canada and the U.S. would just have reverted to most-favoured nation status with trade penalties of just a few per cent. “The alternative this time, of 25 per cent tariffs, is far more severe,” said Brown.

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Canada’s trade surplus with the United States hit a 30-month high of $11.3 billion in December, data showed yesterday — a fact that may not go down well in future negotiations with President Trump.

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American trade deficits are a particular beef of Trump’s who sees them as a “ripoff,” but in this case he may be partly responsible.

The sharp rise in Canadian exports, up 5 per cent in December, was probably driven by businesses moving shipments south of the border ahead of the steep tariffs Trump has been promising since November, said National Bank of Canada economist Jocelyn Paquet.

A jump in oil prices was the other driver. Energy exports rose to $16 billion, their highest level in two years.

The United States is Canada’s biggest energy customer, but Trump doesn’t seem to mind that so much. He’s only planning on slapping a 10 per cent tariff on our energy products.

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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