Trump’s proposed tariffs would ruin major exporting industries in Canada and gouge consumers, experts warn

Donald Trump has fired the opening shots in a trade war that could do significant damage to Canadian businesses and consumers and reframe Canada-U.S. economic relations for the next four years.

 

On Monday evening, Mr. Trump threatened to put 25-per-cent tariffs on all imports from Canada and Mexico on his first day in office unless both countries deal with border security issues. These are much larger tariffs than analysts were expecting in the lead-up to Mr. Trump’s re-election, and pose a huge risk to Canada’s trade-oriented economy, which sends around 75 per cent of exports to the U.S.

 

An across-the-board tariff would hammer Canada’s major exporting industries, including auto manufacturing, oil and gas, mining and agriculture. It would also push up prices for Canadian consumers if Ottawa retaliates with its own tariffs and the Canadian dollar depreciates, as it did after Mr. Trump’s announcement on social media, falling more than 1 per cent against the U.S. currency.

 

Economists and industry organizations were divided on Tuesday about whether Mr. Trump would actually follow through on his threats. Some saw it as a negotiating tactic aimed at squeezing security concessions from Canada and Mexico. Others saw it as the opening move in what could be a concerted effort by the Trump administration to dismantle the liberal trading order and replace it with a more transactional economic system built around boosting U.S. industrial capacity.

“Even if this 25-per-cent punitive tariff doesn’t happen, this won’t be the last set of negotiations over trade and tariffs with the new White House team,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, wrote in a note to clients.

 

“The uncertainties over future trade access to the U.S. market could represent a significant drag on capital spending in Canada’s export industries over the next couple of years, even if Canada and Mexico are able to ward off this immediate tariff threat by taking actions along the border,” he wrote.

 

In the lead-up to the presidential election, economists published a range of estimates for the impact a 10-per-cent universal tariff would have on the Canadian economy – most of which suggested a several percentage point hit to gross domestic product over the next few years. The 25-per-cent tariffs now being threatened by Mr. Trump would be more damaging, particularly as they would only apply to Mexico and Canada, meaning U.S. buyers might shift to other sources.

 

Mr. Trump is separately threatening to increase tariffs on China if it doesn’t address security issues.

 

University of Calgary professor Trevor Tombe estimated on Tuesday that a 25-per-cent tariff, if Canada fully retaliated, would reduce Canada’s real GDP by 2.6 per cent in 2025.

 

The proposed levy also appears to apply to Canadian oil and gas shipments – by far Canada’s biggest export to the U.S. – which many economists had assumed would be exempt from tariffs because of the impact they would have on U.S. gasoline prices.

 

“We must do everything in our power to protect and preserve this energy partnership,” Lisa Baiton, president and chief executive officer of the Canadian Association of Petroleum Producers, said in a statement.

 

“A 25-per-cent tariff on oil and natural gas would likely result in lower production in Canada and higher gasoline and energy costs to American consumers while threatening North American energy security.”

 

A number of industry organizations expressed doubt that Mr. Trump would follow through on his threats because of the damage they would do to American companies with cross-border supply chains and American consumers who would face a spike in prices.

 

“You have to take him seriously, because he’s known to love tariffs, and we have to do our homework to point out what this would mean for his country, but let’s not hit the panic button,” said Pierre Gratton, president and CEO of the Mining Association of Canada.

 

“For example, 50 per cent of U.S. nickel imports come from Canada. A lot of it goes into their defence sector. … If they impose these tariffs, I guess he can get his nickel from Indonesia, but then he’d be supporting the Chinese because they dominate the Indonesian nickel market.”

 

Jean Simard, CEO of the Aluminium Association of Canada, noted that the U.S. produces about 800,000 tonnes of primary aluminum (metal produced from scratch, as opposed to recycled) a year, but it consumes between five and six million tonnes.

 

“If you tax Canadian aluminum coming in, you’re taxing yourself, because in the end it’s the U.S. consumer that pays for it,” Mr. Simard said.

 

Much like the aluminum sector, Canada and the U.S. are closely integrated in steel. Forty per cent of Canada’s steel imports come from the U.S. and 20 per cent of U.S. steel imports come from Canada, according to the Canadian Steel Producers Association.

 

But the Canadian steel industry can’t as easily pivot to send its products to other export markets, as aluminum producers can, because steel’s heavy weight adds considerably to shipping costs, said Catherine Cobden, CEO of CSPA.

 

Since the United States-Mexico-Canada Agreement came into effect in 2020, the Canadian steel industry has generally moved in lockstep with the United States in cracking down on alleged unfair Chinese trade practices. CSPA is now urging Ottawa to impress upon the Trump administration that “an aligned North American approach” will strengthen economic security.

 

For a number of industries, products move back and forth across the border multiple times before they’re turned into a final product. Tariffs would upend this process, hitting businesses and consumers on both sides of the border, said Michael Harvey, executive director of the Canadian Agri-Food Trade Alliance.

 

“I think the strength of our position is that if the United States weakens the supply chains, they’ll make life worse for Americans. And there are a lot of important Americans who understand this and will make their views known to the incoming president,” he said.

 

The North American auto sector is particularly integrated, with vehicles and components crossing borders several times before final assembly and delivery to a dealer’s lot. About 55 per cent of vehicles sold in the United States in 2023 were assembled there, while 15 per cent came from Mexico and 7 or 8 per cent from Canada, according to Ward’s Automotive and Bank of Montreal research.

 

Joe McCabe, president of Auto Forecast Solutions in Pennsylvania, said the proposed auto tariff would drive investment out of Canada, leaving behind closed assembly plants and shuttered parts makers. He predicted it could take about three years for the factories to move to the U.S.

 

“Twenty-five-per-cent is a big number,” Mr. McCabe said by phone. “It will dramatically change future investment in Canada,” he said. “The U.S. will be first and Canada, Mexico will take second place automatically in terms of future investment” by car makers. The parts makers and suppliers that surround an assembly plant would follow, he said. Also at risk would be Volkswagen’s $7-billion electric-car battery plant and Honda’s $15-billion EV plants in Ontario.

 

However, Mr. McCabe said he believes Mexico is the target of Mr. Trump’s threat, and that Washington and Ottawa will find a way around the tariffs with new measures at the northern border that will placate Mr. Trump’s concerns about drugs and illegal migration. “We’re telling people not to panic … [but] we truly think they should be really taking this seriously,” he said.

Unions on both sides of the border said the proposed tariffs would harm workers. Bea Bruske, president of the Canadian Labour Congress, said in a statement that the tariff was “a direct attack on workers” that poses “serious and immediate risk to Canadian jobs, livelihoods and entire communities.”

 

United Steelworkers International president David McCall echoed this. “There is no question that we must address the holes in our global trading system, but Canada is not the problem,” he said in a statement.

 

Matthew Holmes, chief of public policy at the Canadian Chamber of Commerce, said that Canadian companies and politicians need to understand that Mr. Trump may not be amenable to traditional economic arguments.

 

“We’re entering a period where we can’t just have a clear kind of logical conversation about, oh well, Canadian trade is mutually beneficial for both countries. That’s not the paradigm we’re in any longer. This is about winners and losers. That’s how Trump looks at the world and we need to make sure that Canadians are not losers in this,” he said.

 

Paul Lalonde, a partner and lead of the regulatory practice group at Dentons Canada LLP, said he doesn’t expect Mr. Trump to deliver on his threats. But he’s nonetheless advising clients to take a number of practical steps to reduce risks in the event trade barriers do go up. That includes reviewing price-adjustment clauses in contracts with U.S. buyers, trimming exposure to politically sensitive suppliers in China, and thinking about ways to get goods across the border ahead of potential tariffs.

 

“It’s costly to accelerate production and warehouse goods, so you want to make sure you’re doing it in the most effective and efficient way possible. But certainly these things have been on people’s minds … and it’s accelerating in earnest right now.”

 

 

 

 

This article was first reported by The Globe and Mail