One economist says Donald Trump’s new proposed tariffs on Canada and other nations could bring economic growth to a halt in Canada if implemented, though he thinks the comments follow Trump’s typical strategy for negotiations.
Bloomberg News reported Monday that the U.S. president-elect pledged new tariffs on Canada, along with Mexico and China. On his Truth Social network, Trump said he would introduce 25 per cent tariffs on all products from Canada and Mexico as well as an additional 10 per cent on all goods from China. According to CTV News, Prime Minister Justin Trudeau and his government are expected to face questions about the proposed new tariffs from the premiers at a meeting Wednesday.
“We ran some numbers this morning and what it looks like is that if 25 per cent tariffs come on Canada on (a) blanket scale, and we don’t have retaliation, then we’re effectively going to get just zero economic growth in Canada with higher inflation,” James Orlando, a director and senior economist at TD Economics, said in an interview Monday.
Under that scenario, he noted, the Bank of Canada would have to bring interest rates lower than its current path in order to support the economy. On Tuesday, Reuters reported that the Bank of Canada said that if tariffs were implemented it would incorporate that into its economic forecasts.
“Now, if there’s retaliation, I haven’t run that scenario, but that just pushes you down even further into negative territory. So before, we weren’t looking at risk of recession, but now there’s going to be greater threat of that happening if there is retaliation on the 25 per cent tariffs,” Orlando said.
Before the U.S. presidential election, an analysis from TD Economics said that a 10 per cent across-the-board tariff could lead to drop in real gross domestic product (GDP) of 2.4 percentage points over two years compared to baseline projections, assuming retaliatory efforts from Canada.
Currency market impact
Currency markets responded to the news with the Canadian dollar trading at a four-year low on Tuesday morning, at around 71 cents U.S., with Bloomberg News reporting broad advances in the U.S. dollar.
Before Trump’s announcement, Orlando said the Canadian dollar was facing weakness as the Canadian economy was underpromoting the U.S. economy, causing the Bank of Canada to lower interest rates at a faster pace than the U.S. Federal Reserve.
“Immediately when everyone got their messages saying that President Trump’s looking to impose (a) 25 per cent tariff on Canada, that just adds to the risk to the Canadian economy,” he said.
He added that if Canada retaliates to the hypothetical 25 per cent tariff, it could result in negative economic growth, putting more pressure on the Canadian dollar.
“So, we said before, if this really escalates, we’re looking at the Canadian dollar breaking below the 70-cent threshold into the 60s,” Orlando said.
He added that if the rhetoric around trade disputes continues to move in the current direction, it will put further pressure on the Canadian dollar.
Industry impact
Orlando highlighted that a 25 per cent tariff could have significant impacts across several key sectors.
“Canada exports around 77 per cent of our exports to the United States. And energy is obviously the biggest one… in terms of volume for Canada shipping to United States,” he said.
However, Canada ships a number of other products to the U.S., including autos, steel and aluminum, which Orlando said were hot-button issues with the previous Trump administration.
He noted that all of those industries are “on the table,” but also that Canada has increased its volume of exports to the U.S. since the United States-Mexico-Canada Agreement (USMCA) was put in place.
“These sectors that we’re talking about, not only were they exposed previously, but they’re exposed to a greater extent than they were before, because the trade ties have increased over the last few years, which are good trade ties, but based on what’s happening right now, it does point to greater risk exposure for those industries,” Orlando said.
Negotiation strategy
In the run up to the U.S. presidential election, Orlando said, there was more rhetoric toward the U.S. trade relations with Mexico and China, while Canada was less of a topic of discussion. Since then, he said, Canada appears to have become a higher priority for the incoming U.S. administration.
“I think when it comes to the way President Trump goes about negotiations, this is a very typical strategy. You threaten tariffs as a means to potentially get other concessions,” Orlando said.
He noted that U.S.-Canada trade represents a lot of important relationships, and he foresees a lot of upcoming negotiations.
“I don’t think that it’s necessarily set in stone that a blanket 25 per cent tariff would be implemented across all industries in Canada. I don’t think that’s necessarily going to be the outcome, but it’s definitely a starting point I would say for greater negotiations and getting things ready for renegotiations on USMCA,” Orlando said.
USMCA is scheduled to be renegotiated in 2026.
Trump also typically negotiates on a sector-by-sector or policy-by-policy basis, according to Orlando, who added that negotiations could be centred around things like the digital service tax or on the dairy lobby.
“It’ll be interesting to see where the focus ends up going as things progress,” he said.