Canada Braces for 25 Percent US Tariffs

Men work at a construction site in Montreal in a file photo. The Canadian Press/Ryan Remiorz

As the federal government enters into a period of uncertainty, with the new U.S. administration almost sure to impose steep tariffs on Canada, economists say Canada could likely see weaker economic growth, higher inflation, and even a recession in 2025.

“I think it will be pretty weak in 2025, just because of the incredible uncertainty that exists,” Trevor Tombe, an economics professor at the University of Calgary and director of fiscal and economic policy at the school, said of Canada’s economic prospects in the coming year.

“In part, of course, because of potential trade policy changes in the U.S.—that will be a big cloud over many export-oriented sectors—but also domestic uncertainty now with the federal government in a lame-duck mode for many months.”

After returning from a meeting with incoming U.S. President Donald Trump at his Mar-a-Lago resort in Florida last weekend, Alberta Premier Danielle Smith said Canada should be prepared for the promised 25 percent tariffs on Canadian imports to the United States to go ahead.

Ontario Premier Doug Ford said on Jan. 14 that the tariffs could cost 450,000 to 500,000 jobs in his province alone.

Ian Lee, an associate professor at Carleton University’s Sprott School of Business, said Trump’s tariffs would come at a time when the economy is already facing weak growth and declining investment.

“This is very real, and I believe that it’s going to be catastrophic,” Lee told The Epoch Times.

Canada’s Leadership

The new year got off to a fiery start politically, with Prime Minister Justin Trudeau announcing on Jan. 6 that he would be resigning once the Liberal Party had chosen a new leader. Trudeau also asked Gov. Gen. Mary Simon to prorogue Parliament until March 24, which she accepted.

After Parliament resumes, there is a strong possibility that the government will soon fall, as all three opposition parties have said they will vote in favour of a non-confidence motion and trigger an election. This could mean a spring election, in which case Canada would be well into the Trump presidency before it has a stable government.

Prime Minister Justin Trudeau makes an announcement about his plan to resign outside Rideau Cottage in Ottawa on Jan. 6, 2025. The Canadian Press/Adrian Wyld

Tombe said this political uncertainty and the looming tariffs have led the Economic Policy Uncertainty Index for Canada to reach its highest level since the COVID-19 pandemic in 2020. The index is a U.S. indicator published by the Federal Reserve Bank of St. Louis for individual countries.

“That is going to be leading many businesses to prudently pause some of their plans to invest [in Canada] and wait to see how some of this shakes out,” he said. “That’s really unfortunate. It will drag on growth, employment, income, productivity, you name it.”

Trump has threatened to impose 25 percent tariffs on Canada and Mexico if they fail to take sufficient action to stop illegal immigration and drug smuggling into the United States through their borders. While Ottawa has attempted to increase border security, including through a new $1.3 billion border package, the incoming president recently said he will impose “substantial” tariffs on Canada when he takes office on Jan. 20.

According to the Canadian Chamber of Commerce, the 25 percent tariffs could shrink Canada’s economy by 2.6 percent, impact 2.3 million Canadian jobs tied to U.S. exports, and cost each family $1,300 per year. Tombe said the tariffs would be enough to cause a recession, and any retaliatory tariffs by Ottawa would further harm Canadians as well.

Lower Canadian Dollar, Interest Rates

While the Canadian dollar rose to 83 cents to the U.S. dollar in early June 2021, it has since fallen to just around 70 cents in the past month in light of a weaker Canadian economy, Ottawa showing higher deficits, and the Bank of Canada aggressively cutting interest rates compared with the U.S. Federal Reserve’s more dovish policy.

Lee says Trump’s imposition of tariffs would immediately further lower the value of Canada’s dollar, which would impact “every last Canadian.” While all items imported from the United States would become more expensive, Lee pointed out that goods from other countries like Mexico—which track closely to the U.S. dollar—would also become pricier for Canadians.

He says Trump’s tariffs will lead to many American companies avoiding tariffs on Canadian imports by opting to purchase goods from other countries that may come in cheaper, barring any tariffs of their own from the United States.

“We are not the only country in the world that produces goods,” he said.

Canadian dollars, or loonies, sit on U.S. dollar bills in a file photo. The Canadian Press/Paul Chiasson

While a weaker Canadian dollar could be favourable for manufactured products destined for the United States, the discount won’t be enough to compensate the steep U.S. tariffs. And while Lee acknowledged that a weaker Canadian dollar would make the country a more attractive destination for tourism, he said that is “not going to be enough to save us.”

Jack Mintz, president’s fellow at the University of Calgary’s School of Public Policy, said in an interview that a trade war between the United States and Canada would likely devalue the Canadian dollar further and lower economic activity, which could force the Bank of Canada to keep lowering interest rates.

The Bank of Canada cut interest rates five consecutive times in 2024, including two back-to-back 50 basis point reductions on Oct. 23 and Dec. 11. However, the central bank recently warned that Canada’s economic outlook was “clouded” by the possibility of U.S. tariffs and that inflation could be pushed higher by tariffs and higher wages.

On Dec. 5, prior to the December rate cut, BMO’s Chief Economist Doug Porter said 25 percent tariffs would force the Bank of Canada to cut interest rates further, to between 1.5 and 2.5 percent from the 3.75 percent at the time, but noted this estimate did not take into account retaliatory tariffs or the impact on business investment.

Tombe said that while tariffs would increase prices, they would also decrease the demand for goods and services and lower inflationary pressures. He said it was “hard to know” how the Bank of Canada would react but cautioned against seeing falling inflation during a recession as a positive development.

“Unemployment would be rising, people would be more hesitant to purchase items because their household finances are in a more precarious situation. ... That'd be a sign of a really bad time economically,” he said.

Lee predicts that U.S. tariffs will devalue the Canadian dollar and force the Bank of Canada to increase interest rates, which would mirror approaches taken by countries like Turkey, Russia, and Argentina.

Lower Population Growth

Mintz said he foresees Canada’s per capita GDP and productivity slightly increasing due to the government reducing immigration rates, which would in turn increase wages and incentivize businesses to invest more in automation.

Canada’s population increased from 38 million in July 2020 to nearly 41.6 million as of Jan. 15, 2025. In October 2024, Ottawa announced plans to limit the number of temporary residents, which include international students and various categories of temporary works, over the next few years. Meanwhile, Canada’s per capita GDP has been steadily declining since mid-2022 to the level seen in 2019, while its productivity has been declining since its all-time high in 2020.

Mintz also said 2025 could be better for Canada’s housing market, as lower immigration will slightly decrease rental prices. A January Rentals.ca report found the average asking rents for residential properties ended 2024 down 3.2 percent compared to the end of 2023.

However, while high immigration rates strained Canada’s housing supply, it had the benefit of preventing the country from officially entering a recession. Elevated consumption from newcomers allowed the economy to grow by 0.4 percent in the first quarter of 2024 after zero growth in the fourth quarter of 2023. This means the established definition of a recession—two consecutive quarters of negative GDP growth—was not met.

An RBC report on Canada’s 2025 outlook warned that reduced immigration targets “could subtract nearly one percentage point in total from GDP forecasts over the next three years.”

A New Government?

While 2025 could bring about other global developments that could also have impacts in Canada—including the recently announced Israel-Hamas ceasefire and the potential for a ceasefire in the Ukraine-Russia war—Canada is undergoing major changes internally this year as well.

Conservative Leader Pierre Poilievre rises during Question Period in the House of Commons on Parliament Hill in Ottawa, on Oct. 9, 2024. The Canadian Press/Spencer Colby

Polls show that the Conservative Party—which has campaigned on reducing taxes, freeing up energy exports, and reducing government red tape—is currently on track to win a majority government.

Regardless of which party takes power after the next election, Tombe said it will take time for the government to pass legislation and implement new policies, and for the impact of those polices to manifest in the economy and broader society.

“There are some scenarios where we don’t actually see an election until June, maybe even later than that. That means we might not even see a federal budget until the fall,” he said.

Lee said he believes that if Conservative Leader Pierre Poilievre were to form government, one of the first things he would do is “hyper accelerate” the timeline for United States-Mexico-Canada free trade agreement renegotiations, which are scheduled for 2026. Trump has said he will renegotiate that agreement, which came into effect in 2020 to replace the North American Free Trade Agreement.

Lee said Trump will likely focus on dismantling protected Canadian industries like dairy, telecom, airlines, and banking; getting Canada to increase its defence spending to 2 percent of GDP “immediately”; and further tightening the border to reduce illegal immigration and drug smuggling. He said Ottawa would be wise to concede on these fronts instead of engaging in a trade war.

“The idea that we are equal to the U.S., or we can compete in a trade war, is simply delusional. We wouldn’t stand a snowball’s chance in hell for a nanosecond in a trade war with the United States,” Lee said. “I believe the people around Poilievre understand this, which is why we’ve got to do a deal with the States.”

He believes the end result would be closer economic integration between the two countries and Canada moving away from progressive policies like the federal carbon tax, reduced oil exports, and a higher capital gains tax.

“We cannot be going in a divergent direction on major economic issues, and we have been for the last nine years under the Trudeau government,” he said. “We’ve got to have convergence, not divergence, on major economic policies.”

When it comes to the outlook of stocks in 2025, Mintz said he expects them to rise depending on the performance of oil and gas and the U.S. financial system, but he is “not expecting the market to be as good this year as the previous year.” He added that an end to the Ukraine war and the Israel-Hamas conflict could push oil prices lower, which would be negative for the Canadian economy.

“If we’re moving to a quieter period in the Middle East, then I think oil prices will be more driven by normal demand-supply characteristics,” he said.