Need for structural rethink of Canada’s economic growth in face of Trump’s tariff promise: Top economists

Donald Trump’s threat to impose tariffs on Canadian imports poses huge risk to the country’s economy. But it also provides an opportunity to address structural problems that hold back economic growth, and to double-down on sectors in which Canadian companies can thrive in an increasingly protectionist world.

 

That’s according to the chief economists at five of Canada’s largest banks, who delivered their 2025 outlooks at an Economic Club of Canada event in Toronto on Thursday.

 

None of them played down the dire impact a 25-per-cent U.S. tariff would have on Canadian exports and business investment. Bank of Montreal chief economist Douglas Porter, for instance, said that tariffs at this level could knock around 2 per cent off Canadian GDP.

 

Several of the economists, however, suggested that Mr. Trump’s belligerence provides a window to improve Canada’s domestic business climate and address long-standing problems, such as interprovincial trade barriers and a burdensome regulatory environment.

 

“The shock from Canada is occurring in an environment of weakness to start with, and that compounds some of the challenges and shocks,” said Frances Donald, chief economist at Royal Bank of Canada.

“We need to remember that we can simultaneously be building up our economic immune system, and not to lose sight of some of these elements that will help us be more resilient. Because this isn’t the last geopolitical shock Canada is going to face. We are in a new era,” she said.

 

Beata Caranci, chief economist at Toronto-Dominion Bank, said that Canada should start by improving the competitiveness of its corporate tax structure, to keep pulling investment into the country despite the risk of a thicker border with the U.S.

 

Policy makers also need to do more to accelerate the development of natural resources, especially critical minerals, she said. That would give Canada products that are in high demand in the U.S. as it tries to wean itself off Chinese battery supply chains. And it would help build out an industrial base that is less susceptible to U.S. attempts to reshore manufacturing industries.

 

“There’s nothing stopping the U.S. from building a car from beginning to end. They can do it. It requires a restructuring of their labour market; it would lead to higher end-user costs. But there’s nothing stopping them from doing that,” Ms. Caranci said.

 

“What we ultimately have to do is think through the structure of our economy, look at our competitive advantage, what we have, what they don’t, and move our economy in that way.”

 

National Bank of Canada chief economist Stéfane Marion said in contrast that Canada should focus on growing its manufacturing sector, fuelled by the country’s supply of inexpensive electricity and natural gas. “When you look at the size of the manufacturing sector, we’ve made ourselves irrelevant in the North American supply chain,” he said.

 

It remains unclear whether Mr. Trump will follow through with his tariff threats, or what form they might ultimately take. There have been U.S. media reports in recent days suggesting that members of Mr. Trump’s team are developing plans for sector-specific tariffs rather than across-the-board levies. However, Mr. Trump denied in a social-media post that he was watering down his tariff plans.

Financial markets are not yet betting on full 25-per-cent U.S. tariffs on Canada. The Canadian dollar has depreciated against the U.S. dollar in recent months, falling below 70 US cents for the first time in four years. It would likely fall much further if Mr. Trump imposes the full 25-per-cent tariff, said Avery Shenfeld, chief economist at Canadian Imperial Bank of Canada.

 

A weaker loonie would help offset the impact of the tariff on exports by making Canadian goods more attractive to U.S. buyers. But that’s not much of a silver lining, Mr. Shenfeld said. “That does help push our exports, but let’s not forget, it makes us poorer. When we want to import things, we can afford less,” he said.

 

Mr. Trump’s desire to pursue trade wars may be impeded by financial markets in other ways. Tariffs tend to push up inflation, leading to higher interest rates. U.S. treasury yields have already risen sharply in recent months on the expectation of fewer Federal Reserve rate cuts, making U.S. borrowing costs more expensive and weighing on riskier assets.

 

“One limiter from the Trump agenda is the bond market that could rebel,” Mr. Porter of BMO said. “It’s very interesting that even as the Fed has cut by 100 basis points in the last few months, we’ve actually seen long-term U.S. bond yields rise to almost the highest of the cycle.”

 

 

 

 

This article was first reported by The Globe and Mail