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US President-elect Donald Trump’s proposed tariffs—part of a broader plan targeting Canada, Mexico, and China—could have serious implications for Canada’s domestic manufacturing industry and economic recovery.
Analysts warn that if implemented, the proposed tariffs could significantly weaken Canadian GDP growth while further straining the deeply interdependent North American production and trade system. Key sectors like energy and auto manufacturing would see the greatest consequences.
The uncertainty casts a shadow on Canada’s export-driven industries, and economists caution that the likelihood of future trade disputes could also pose long-term risks for Canadian markets and economic stability.
In a post to Truth Social on Nov. 26, Trump confirmed the market’s worst fears, announcing that tariffs would take effect on Jan. 20, 2025 (the day of his inauguration), unless Canada implements stricter measures regarding migrants and illegal drugs entering the United States. “This tariff will remain in effect until such time as drugs, particularly fentanyl, and all illegal aliens stop this invasion of our country!” he wrote.
The loonie also plunged to a four-year low, reflecting currency trader concerns about heightened volatility. While it remains uncertain whether Trump will follow through on his threat, Canadian government officials are scrambling to contain the fallout as analysts work to gauge the economic consequences of such a move.
Here is what a few experts have said on the subject.
Stephen Brown, deputy chief North America economist at Capital Economics
“The bigger point is that the threat to impose tariffs on ‘Day One’ supports our view that Trump is likely to move much more quickly with tariffs than during his first term.
“Trump is explicitly returning to his first-term playbook of using tariffs to extract concessions on specific issues. That doesn’t exclude him from using tariffs in the future with broader aims, such as protecting domestic industries or raising revenue. The implication seems to be that the countries could avoid these tariffs by presenting credible plans to take action to reduce drug supply or secure their borders, much like how Mexico staved off a similar threat from Trump in 2019.
“If Trump were to follow through with the tariffs, then the three countries may feel obliged to retaliate, although we suspect any measures would be designed to limit the economic damage and minimize the risk of countermeasures.
“We continue to assume that Trump will impose a 10% universal import tariff by the second quarter of next year, despite speculation that some of his more moderate Cabinet nominations could act as a break on those plans.
“Trump doesn’t see allies, only adversaries. Now it’s Canada and Mexico in the firing line, but Europe could easily catch the next stray bullet. Even if Canada and Mexico appease Trump this time, the threat is a reminder that the USMCA trade deal will provide little protection from Trump’s proposed universal import tariff. Strong trade links mean that the risks to Canada’s economic growth are arguably still greater than they are for China.”
Robert Kavcic, senior economist at BMO Economics
“We’d expected the Canadian dollar to see the biggest and most immediate market impact, extending the weakness seen in recent months. Currency adjustments can typically absorb much of the impact in a tariff setting. In this event, we see room for further depreciation from recent levels above C$1.41 per US dollar.
“The ultimate size and coverage of the tariffs will determine the extent of the negative impact on growth. But, keep in mind that they would be set against a backdrop of firming domestic demand in Canada in areas like housing and consumer spending. Still, we’d be looking at a net negative growth outcome, and as an early first pass, downward revisions would counter some of the recent upward revisions recently made to the near-term growth outlook. We currently see 2.1% real GDP growth for 2025. The downward revisions would likely be felt more in the back half of the year and into 2026.
“At the industry level, energy exports were nearly a third of Canadian goods exports to the US. One has to question the legitimacy of tariff threats on Canadian energy, when there are few obvious near-term alternatives to more than 3 million barrels per day of imports on the US side.
“For the Bank of Canada, a softer growth profile could set policy on a more dovish path, but a weaker currency and some potential inflation impact would likely keep it from deviating much from our current call. That said, if there is a tit-for-tat response on the Canadian side, we get into more of a classic supply shock, which would become more inflationary and peg interest rates higher than the current baseline. As of now, our call sees Bank of Canada policy rates falling to 2.5% by September 2025.”
Avery Shenfeld, senior economist at CIBC
“Given the damage that such tariffs would inflict, particularly on Canada and Mexico given their close trade ties with the US, the announcement looks like a move to get action on border issues and then declare a policy win for the President, rather than as the first iteration of the administration’s trade policy. But it does warn of more challenging times ahead for Canada-US and Mexico-US relations.
“A tariff at the 25% level would no doubt be a major shockwave for Canadian industry, but the affected players would include many US-based companies in industries, like autos, where these companies have integrated supply chains that cross both the US-Canada and US-Mexico border. Others that export to Canada or Mexico will fear retaliatory tariffs. So governments will come under pressure to do what it takes to either prevent these tariffs from being imposed or have them removed very quickly.
“Even if this 25% punitive tariff doesn’t happen, this won’t be the last set of negotiations over trade and tariffs with the new White House team. Trump’s willingness to brandish the tariff weapon so quickly, before even getting to his desk in the Oval Office, portends a long road ahead for both Canada and Mexico to preserve what they negotiated during Trump’s first term. The uncertainties over future trade access to the US market could represent a significant drag on capital spending in Canada’s export industries over the next couple of years.”
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“The pledge is more severe for Canada than the 10% across-the-board tariff on which he campaigned, and importantly leaves other trading partners unscathed, at least for now. Such a limited move would allow for more substitution away from Canadian goods and toward those from jurisdictions that aren’t being targeted.
“The depreciation in the Canadian dollar of roughly 1% is notable, but doesn’t seem to reflect a high conviction in these harsher-than-anticipated tariffs being implemented. Our previous estimates showed that a 10% tariff on all non-energy Canadian exports to the US, in conjunction with 10% tariffs on all other goods headed to America, would lower the level of real GDP in Canada by roughly 1% by the end of 2026. Scaling the severity and speed of the tariff impact up to the new threat would obviously leave the Canadian economy materially worse off than that estimate, but would also have significant repercussions for the American economy.”
A Statement from TD Economics
“With President Trump already threatening 25% tariffs on Canada, it means greater exposure because the economic trade ties have deepened since the USMCA came into effect in 2020. When the threat on the campaign trail was for 10% tariffs, our research indicated that it would lead to a 5% hit to Canadian export volumes and risk sending the Canadian economy into a period of extended stagnation through 2025 and 2026.
“The Loonie will remain under pressure as long as tariff threats remain front and center for Canada. It would not be a surprise for the Loonie to push below the 70 US cent threshold if threats become reality, further dampening investment sentiment toward Canada.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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