President-elect Donald Trump has threatened to impose 25 percent import tariffs on Canadian and Mexican products, which is sending shockwaves of fear and uncertainty across North American borders. This decision could have major implications for these countries with longstanding economic and political ties.
According to the U.S. Commerce Department, Canada buys more U.S.-made goods than any other country and is also in a position to levy countermeasures. The U.S. trade deficit on goods with Canada was $55 billion during the first 11 months of last year.
Canada is the largest export market for 36 U.S. states, making the annual trade relationship between the two valued at approximately $1.3 trillion. If the sweeping tariffs are imposed, $3.6 billion in goods that cross the U.S.-Canada border daily are in jeopardy. What this means for Canada is that the country’s GDP would contract, putting nearly a million and a half jobs across sectors at risk. Of the most threatened are positions in energy, manufacturing, forestry, and machinery sectors.
The U.S. would not emerge unscathed either. Its GDP would face a reduction and its deficit would increase alongside supply chain disruptions, and the resulting aggressive monetary policy interventions would have implications on inflation on both sides of the border. Another element to consider is the tariff would be in direct violation of the United States-Mexico-Canada Agreement (USMCA) provisions, which are designed to ensure free trade between the member countries, which means Canada and Mexico could issue legal challenges.
Consumers would see the costs of goods and services rise significantly, placing even greater strain on budgets and debt loads. It could also destroy established supply chains, raising operational costs at the expense of efficiency and global competitiveness.
Many analysts have gone on record to note that tariffs are unlikely to benefit American consumers, who will be paying more for Canadian goods like lumber, automotive parts, and other goods that will increase the costs of housing and vehicles. Companies impacted by the potential threat are likely undertaking supply chain assessments to prepare for any possible disruptions and mitigate the impacts long-term, which will ultimately see companies seeking more reliable supplier agreements and improved vertical integration looking ahead.
Policymakers are also preparing to act accordingly, be it through bold policies or greater investments in domestic infrastructure to support critical manufacturing projects. The Canadian government has said that it has a three-phased response that is ready depending on how this plays out. The country could cut off energy exports to the U.S. or implement an export tax on them, though this would also be in violation of the USMCA.
The Canadian government is being urged by industry groups to protect businesses in the face of the threats. If implemented, there have been calls for the government to implement a short-term tariff relief program to lessen the blow of the impacts for exporters, as well as urging it to address interprovincial trade barriers. As it stands, the threat alone has led many businesses to pause investment plans and hiring, which means the threats are already having negative implications on the strength of companies on both sides of the border.
