A blanket tariff by the U.S. on Canadian imports is unlikely to materialize early next year despite rhetoric from U.S. president-elect Donald Trump. Still, the mere prospect of new tariffs has caused considerable anxiety in Canada.
Even the notion of new U.S. tariffs casts trade uncertainty over Canadian businesses.
Such a move would have dire economic implications on both countries’ economies given the essential role of Canada in U.S. supply chains and overall economic stability.
Even without a blanket tariff, there is cause for concern as selective U.S. tariffs on one or more intermediate goods are possible — and would be disruptive to both countries’ economies.
Retaliatory tariffs from Canada’s government, which the country has imposed in the past and is poised to repeat, would lead to further supply chain issues and to higher inflation for Canadian consumers.
The prospect of tariffs comes at a time when Canada has already been struggling to compete for investment with its neighbor to the south. This year, foreign capital invested in U.S. securities exceeded the sum of foreign capital in the next 12 economies combined. American expansionary policies and a new tariff regime could make the U.S. even more of a magnet for capital, making it challenging for Canada to attract foreign investments.
Trade policy uncertainty could contribute to the low value of the loonie and further challenge economic growth.
To illustrate how tariffs would affect both countries, take a look at energy and auto manufacturing — the Canadian industries with the highest exports to the U.S.
Energy
The energy relationship between Canada and the U.S. goes beyond the sector itself. It’s integral to the functioning of both countries since every business activity — from transportation to heating to power — requires energy.
Energy exports make up about one-quarter of Canada’s total exports. Canada exports 4.5 million barrels of crude oil daily to the U.S. This accounts for about 60 per cent of its total oil imports — a proportion that has continued to climb.
The U.S. is the destination of an overwhelming 97 per cent of Canada’s crude oil exports, two-thirds of which end up in the U.S. Midwest. Ninety-nine per cent of natural gas imported by the U.S. comes from Canada.
Energy tariffs would cause gasoline, electricity and heating costs to jump, affecting businesses and consumers alike.
Canadian energy companies would also encounter reduced demand because of the costs of tariffs, which would result in lower export volumes. In this scenario, these companies might be forced to accept lower prices to stay competitive.
The Trans Mountain pipeline expansion presents an opportunity to increase Canadian oil exports to countries in Asia. But this option comes with its own caveats; building up the market will take years and the pipeline has its own challenges domestically. The U.S. remains the single largest consumer of Canadian energy products for the foreseeable future.
Auto manufacturing
There are few industries as integrated among Canada, the U.S. and Mexico as the auto industry.
This automotive supply chain accounts for 22 per cent of import and exports under the Canada-United States-Mexico Agreement, which took effect in 2020.
The supply chain operates with different auto parts being manufactured in different countries, crossing the border seven to eight times before completion.
The Detroit-Windsor border crossing had over 2.5 million trucks cross in 2023, a substantial portion of which was related to auto manufacturing. The U.S. market accounts for 91 per cent of Canadian automotive sector exports.
A tariff even on some materials or parts would upend this supply chain. With potential retaliation considered, auto parts would be subject to tariffs each time they cross the border, which would cause the cost of production to balloon.
There would also be an increase in delays at border crossings because of customs declaration and payment. These delays in turn would lead to inefficiencies and higher costs for production and inventory storage.
Consumers would also see car prices skyrocket, which would hamper the industry’s competitiveness in the global market.
Additional context
The U.S. is Canada’s largest trading partner, the destination of three-quarters of Canada’s merchandise exports and the source of two-thirds of Canada’s imports.
In 2023, merchandise exports from Canada to the U.S. totalled $592.7 billion, while imports reached $484 billion.
Canada is the leading exporter to the U.S. of key commodities like crude oil, auto parts, agricultural products and aluminum. Canada is the largest trading partner to 38 U.S. states.
As part of CUSMA, hundreds of millions of dollars’ worth of goods cross borders daily with minimal-to-no customs. This relationship is deeply entwined in the countries’ manufacturing and consumption patterns, while industries like energy, auto manufacturing, mining, agriculture, and consumer products have flourished and become global leaders.
Broader implications
The most immediate impact on Canadian businesses and consumers comes from trade policy uncertainty.
The Canadian dollars has already dropped to multi-year lows because of the differential in interest rate and growth rate between Canada and the U.S. alongside the possibility of tariffs.
With the loonie expected to stay low through early 2025, imports would be more expensive and consumers would pay more for goods from the U.S. Conversely, a cheaper loonie would benefit exporters.
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Tariffs between Canada and the U.S. have precedent. During President Donald Trump’s first administration, tariffs on Canadian steel and aluminum—as well as Canada’s reciprocal tariffs — were in place for just over a year.
Under a selective tariff scenario, Canadian exports would be affected and some U.S. businesses might eventually switch to domestic suppliers.
But given how intertwined the auto industry is and the challenges of establishing a manufacturing footprint, it is not feasible to completely untangle the countries’ auto supply chain.
It’s the importers who pay the tariffs, which would be U.S. producers or distributers in this situation. Those costs would be passed onto both Canadian and American consumers, lifting inflation and shrinking supply.
The takeaway
The U.S. is Canada’s most important trade partner by a wide margin. Even the notion of new U.S. tariffs casts trade uncertainty over Canadian businesses. The possibility of tariffs could keep the Canadian dollar low and cause an uptick in inflation as possible supply chain disruptions loom.
