Economists paint bleak picture as trade war erupts

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Business leaders and economists reacted with dismay Tuesday after United States President Donald Trump launched a North American trade war that is expected to have severe consequences for the Canadian economy.

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“It’s going to be bad,” said Carl Gomez, the chief economist and head of market analytics for Canada at real estate data company CoStar Group Inc. “This is going to knock several points of GDP growth off Canada, if sustained, and it’s also detrimental to the United States economy and the global economy.”

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Trump imposed the 25 per cent tariff on Canadian goods and 10 per cent tariff on Canadian energy at midnight Tuesday, following through on threats that date back to November. In response, the Canadian government immediately imposed 25 per cent tariffs on $30 billion worth of American goods, with an additional $125 billion of goods set to be tariffed in 21 days.

“Trump’s tariff hammer will come down hard on Canada’s economy,” said Bank of Montreal chief economist Douglas Porter, in a note. “If the announced tariffs remain in place for one year, the economy would face the risk of a moderate recession.”

The tariffs are also expected to raise prices, with BMO anticipating inflation to rise by one percentage point this year, with the consumer price index sitting at 1.9 per cent in January.

Trump’s tariff hammer will come down hard on Canada’s economy

Douglas Porter

Goldy Hyder, president and chief executive of the Business Council of Canada, said he will be watching rising prices closely in the U.S. as a consequence of the tariffs.

“We’re going to see the return of inflation,” he said. “Cost of groceries, cost of vegetables, cost of juices and then of course we all know how sensitive Americans are to the price of gasoline — they’re going to feel this.”

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Two-way trade between Canada and the U.S. is worth $1.3 trillion on an annual basis. Statistics Canada says nearly 1.8 million Canadian jobs — 8.8 per cent of the country’s total employment — worked in industries where 35 per cent or more of jobs depended on U.S. demand for Canadian exports. Nearly 1.4 million American jobs are tied to Canadian exports and 2.3 million Canadian jobs are tied to U.S. exports, according to the Canadian Chamber of Commerce.

“We will probably see a rise in the overall unemployment,” said Gomez, adding that manufacturing in central Canada and in particular the auto sector will be hit hard, impacting the industry on both sides of the border.

Economists expect Canadian unemployment to rise to eight per cent, as the result of the tariffs. The Bank of Canada estimates that a trade war with the U.S. would cut business investment by 12 per cent and decrease Canadian exports by 8.5 per cent after the first year. The central bank also says Canadian growth would decline by three per cent over the next two years.

Bank of Canada governor Tiff Macklem said in a speech last month that there would be no “bounce back” for the Canadian economy, like the one seen during the COVID-19 pandemic.

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There is going to be a lot of pain along the way

Dennis Darby

Dennis Darby, president and chief executive of Canadian Manufacturers & Exporters, said the group’s members have already seen a chill on business investment and a build-up of inventory in the United States in the lead-up to the tariff announcement. Darby added that 40-50 per cent of members were looking at moving production to the U.S.

“These (tariffs) are certainly unjustified on any basis that matters and I think industries have to figure out how to react in the short-term, it’s very uncertain,” he said, on the sidelines of a manufacturing conference in the United Kingdom. “If in fact the U.S. is going to persist with their American-only policy, I think we have a lot of work to do to think about how we’re going to diversify our trade, but there is going to be a lot of pain along the way.”

Darby added that he had not heard anything yet with regards to layoffs, but anticipates manufacturers in the auto industry will be the first to report potential job disruptions.

The American business community also reacted to the news on Tuesday, with the U.S. Chamber of Commerce calling for an end to the tariffs.

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“We also want to work together to keep costs down, but tariffs will only raise prices and increase the economic pain being felt by everyday Americans across the country,” said Neil Bradley, chief policy officer at chamber. “We urge reconsideration of this policy and a swift end to these tariffs.”

This is shooting the puck in your own net…. It makes no sense

Goldy Hyder

Tuesday’s tariffs were just the first round of trade action promised by the Trump administration, with an additional 25 per cent levy set to be imposed on Canadian steel and aluminum exports on March 12. Trump has also promised to impose “reciprocal” tariffs which could potentially match Canada’s digital sales tax on April 2.

“You’re talking 50, 60, 70 per cent tariffs here,” said Hyder. “This is shooting the puck in your own net…. It makes no sense.”

Hyder added that he remains “cautiously optimistic” that a conclusion can be reached on trade problems with the U.S., based on a meeting he had with the office of the United States Trade Representative a few weeks ago, whose mandate remains the review and renewal of the United States-Mexico-Canada Agreement by July of 2026. 

“By the way when you are in that process you can’t be having tariffs on your trading partners, if you’re sitting down to do a trade agreement with them,” he said. “I note with great interest, not once has the president ever indicated that he intends to do away from the USMCA, or to turn it into two bilaterals.”

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In the meantime, economic uncertainty in Canada has now reached record-breaking levels.

“The policy uncertainty index for Canada has gone to record high levels, it has surpassed the global financial crisis, it has surpassed COVID — this is a huge issue for Canadians,” said Gomez.

• Email: jgowling@postmedia.com

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