Economic insight provided by Alberta Central Chief Economist Charles St-Arnaud.
Key takeaways:
- Although the scope of US tariffs on Canada remains unchanged, yesterday’s announcement will still have a negative impact on the Canadian economy.
- The negative impact the reciprocal tariffs will have on the global economy will have negative spillovers on the Canadian economy.
- Slower global growth will reduce demand for commodities, resulting in lower prices. A reduction in export volume and a deterioration in the terms-of-trade will be a drag on Canada’s economy, especially for provinces dependent on commodity exports like Alberta, Saskatchewan, and BC.
- Continued tariffs on steel, aluminum and autos will continue to have a negative impact on the economy, especially in the manufacturing-heavy provinces of Ontario and Quebec.
- Uncertainty is extremely elevated and is unlikely to abate rapidly. As we wrote (see US tariffs: A death by a thousand cuts), uncertainty can be a slow killer of the economy, with spending decisions being postponed and cancelled. The longer uncertainty persists, the broader and more persistent the impact will be on investment and the economy.
The U.S. administration announced yesterday the implementation of what it calls “reciprocal tariffs”, which were put in place to address what the US Administration considered a barrier to imports from the U.S. These trade irritants ranged from outright tariffs, quotas, regulations, to even value-added tax (VAT). The tariffs announced range from a minimum of 10% to a maximum of 49% on imports from Vietnam. These tariffs do not apply to steel, aluminum, or vehicles and parts, which are already subject to a separate 25% tariff.
After much concern that Canada could face the imposition of significant reciprocal tariffs, given President Trump’s criticism of the supply management system, the digital tax, and the GST (a value-added tax), it was a relief to see no new tariffs being announced on Canada.
However, a new provision was added to the tariffs on Canada. The current tariffs on Canada are levied using the International Emergency Economic Powers Act (IEEPA) to fight fentanyl smuggling and illegal immigration. The new provision states that, if the IEEPA order was lifted, Canada would face reciprocal tariffs of 12% on all non-USMCA-compliant exports to the US.
This means that the structure of the US tariffs remains unchanged:
- USMCA-compliant imports from Canada 0% tariff, otherwise 25%. Unless they are non-compliant energy or potash imports, which have a levy of 10%.
- Steel and aluminum imports from Canada remain tariffed at 25%.
- Auto imports from Canada remain tariffed at 25% for the non-US-produced portion.
- If the IEEPA orders are lifted, USMCA-compliant goods would continue to receive preferential treatment, while non-compliant goods would face a uniform 12% reciprocal tariff.
Impact on Canada
With no new tariffs being announced, the impact on Canada will be more indirect. The sharp increase in tariffs on most US trading partners will be an important negative shock to the global economy. As a result, we should see a meaningful growth slowdown, which will reduce global demand for commodities and their prices. Already today, we are seeing oil prices declining by about 7%. The negative terms-of-trade shock will be important for provinces that export commodities and will add to the lower quantities being exported.
The negative impact of U.S. tariffs on the Canadian economy remains significant.
- Uncertainty is extremely elevated (See Fig 1). As we wrote (see US tariffs: A death by a thousand cuts), uncertainty can be a slow killer of the economy, with spending decisions being postponed and cancelled. The longer uncertainty persists, the broader and more persistent the impact will be on investment and the economy. As such, while new investment decisions are likely the first to be affected, eventually, firms will reconsider their decision to produce in Canada. This means that any investment in modernizing a current production facility could be diverted to producing in the US, in addition to investments in new facilities. Already, we have seen the Business Barometer from the Canadian Federation of Independent Businesses reaching its lowest level on record in February (Fig 2). Similarly, the Conference Board of Canada Consumer Confidence Index dropped close to its lowest level on record in February. Both indicators are likely to deteriorate further. An economic contraction in the second quarter of 2025 is fast becoming a reality.
- Tariffs on steel, aluminum and the non-US-produced share of auto exports remain in place. These will have a negative impact on the economy, especially in the manufacturing-heavy provinces of Ontario and Quebec.
- The increased likelihood of a significant global slowdown, potentially including a recession, and the higher probability of a recession in the US would have negative spillovers on Canada’s economy. It would lower demand for Canadian goods, especially in the event of a US recession, and add to the drag from tariffs. Moreover, weaker global growth will lower demand for commodities, affecting Canada’s exports of these commodities, while also pushing commodity prices lower, leading to a negative terms-of-trade shock for Canada. This will particularly affect provinces that are heavy exporters of commodities, Alberta, Saskatchewan and BC, in particular
Although the scope of US tariffs on Canada remains unchanged, yesterday’s announcement will still have a negative impact on the Canadian economy.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.