The U.S. administration has implemented blanket tariffs on Canada and Mexico after a 30-day reprieve with 25% on all imports except 10% on Canadian energy. An additional 10% tariff on China is also planned.
Canada has been hit with its largest trade shock in nearly 100 years and responded promptly with 25% tariffs on $30 billion of U.S. goods, rising to $155 billion in 21 days. Evolving trade policies and government responses still remain highly uncertain as we highlighted in our first economic takeaways a month ago.
But, as we assess the implications of the implementation of tariffs on our forecasts—to be released in our Financial Markets Monthly next week—here is a cheat sheet summary of what we know and are incorporating into our outlook.
Lack of precedence for economic shock
This is not 2018 and we have a limited experience for this magnitude of a trade shock. In 2018-19, tariff policies raised the average import duty from 1.5% to approximately 3%. As of March 4, the average tariff rate quadruples to nearly 12%. That’s the largest trade shock to the U.S. and Canada since the 1930s.
Interestingly, these tariffs apply to double the share of U.S. imports (Canada + Mexico = 30%) than China-only tariffs (15%). The U.S. economy, in particular, has experienced a sizeable economic shock since 2018—prices are up 29% since Donald Trump’s first day in office eight years ago and we suspect the sensitivity to inflation is much higher now than before.
Impact is highly variable depending on duration
The ultimate impact of these tariffs on Canada and the U.S. will depend on how long they—and retaliatory measures—remain in place. Those are political decisions and difficult to economically forecast. The movement of currencies is key as well, because it can buffer some of the impact on inflation and growth on both sides of the border.
As a specific timeline, we previously delineated a duration of three to six months to show material mark downs in growth for the Canadian and U.S. economies. Tariffs would likely reduce real gross domestic product growth to zero in 2025 if implemented beyond a year and lead to a 2% contraction in 2026 with a peak unemployment rate more than 8%.
Canada’s deeply U.S-integrated manufacturing sector (about 10% of GDP) is particularly vulnerable, along with its heartland in Ontario and Quebec. Alberta and New Brunswick are also among the vulnerable provinces due to their commodity exposure, but the lower tariff rate implies an easier adjustment. Again, these scenarios make many assumptions about the path of currencies, retaliatory measures, central bank responses and fiscal packages. Read more on our scenario analysis here.
The damage is already in play
The threat of tariffs alone has already been enough to create an impact. We have already seen early evidence of stockpiling from U.S. importers ahead of the tariff implementation, a feature in our Playbook for how to measure a tariff shock in Canada. This has worsened the U.S. trade deficit and mechanically pushed down U.S. GDP nowcasts.
Meanwhile, uncertainty measures are at or near all-time highs, which will weigh on business investment and hiring in Canada. Surveys like the ISM Manufacturing indicator showed a surge in expectations for prices combined with a drop in new orders and employment activity in February—a stagflationary sentiment likely to reveal itself in a variety of other indicators into March.
A stagflationary shock for the U.S.
While Canada’s concerns are tilted towards the growth side, we expect the U.S. will struggle with the inflationary impact of broad-based tariffs. With a persistent tariff, we expect the U.S. could see a year-over-year rise in core inflation of 0.5-1 percentage point, pushing it above 3% by the end of 2025. However, growth would also need to be downgraded with our forecast suggesting that U.S. growth would move sideways in 2025 with risks to the downside should tariffs expand to Europe or globally. Growth would likely be materially impacted as well with tariffs in place for at least six months.
That said, we expect a very tight labor market and lack of labor supply will keep a lid on how high the unemployment rate can rise. That will make the U.S. Federal Reserve’s job especially challenging as they maneuver a supply-side shock to inflation that could be unresponsive to interest rate hikes. Currently, we have the Fed on hold for 2025, but further deterioration in sentiment or investment could prompt higher probabilities of additional cuts.
Incoming near-term support
Central bankers and governments may have time. Indeed, they might need time to develop strategies to react. The Bank of Canada has been noncommittal in how it would respond to a tariff shock—waiting to see whether inflation or growth dominate. Without tariffs, we expected the BoC to gradually cut rates to 2.25%. Now, we expect that the longer tariffs remain in play, the greater the likelihood that rates fall faster and by a larger magnitude.
Provincial and federal stimulus packages will also matter. A prolonged trade shock means governments would have to respond to both the immediate recession, while also strengthening the underlying economy that is ill positioned to absorb such a shock. Targeted support would help to offset the growth impact, while broad-based cash transfers risk inflation that would complicate the BoC’s job and limit future fiscal firepower. Prorogued legislatures at the federal level and in Ontario conveniently give policymakers more time to plan their reaction, while automatic stabilizers like employment insurance or Crown financial programs likely provide latitude to address many immediate concerns.
An eye on medium- and longer-term solutions
There are longer-term plays available to facilitate export diversification and stronger domestic growth drivers despite the hurdles facing the Canadian economy. One is the U.S.’s recognition of the importance of Canadian commodities. Lower tariff rates on Canadian energy and critical minerals reveal how big a global player Canada is on oil, gas, potash, agrifood, uranium and other essentials without easy substitutes. Expanding a cross-border partnership in these areas could refocus the relationship, while underpinning a greater value capture in manufacturing and ancillary services, and greater trade diversification.
There is increasing consensus in Canada on the urgency of addressing structural growth impediments from interprovincial trade barriers to peer-lagging business investment and high regulatory burdens. There are no easy fixes for U.S. tariffs. These issues could only be addressed over time, but would unequivocally be positive for the Canadian economy.
Trade turbulence is likely to be a persistent theme
While our current focus is on 25% across the board tariffs on Canadian and Mexican goods, there are other trade-related deadlines coming. In addition to the planned March 12 implementation of previously announced steel and aluminum tariffs, April 2 is the next trigger date. The U.S. administration is expecting trade analysis from several agencies to support reciprocal tariffs, while its already put out a notice for stakeholder views on USMCA/CUSMA in advance of July 2026 renegotiations. Ongoing trade disruption means both economies can expect to be beset by policy uncertainty that weighs on business investment.
