Escalating trade tensions between Canada and the United States are projected to reduce Canada's real GDP by 1.4% over a five-year period compared to 2024 levels. According to the Parliamentary Budget Officer (PBO), this downturn stems from a series of tariffs and retaliatory measures implemented since early 2025.

How have trade barriers changed?

The trading relationship has shifted from the largely tariff-free access provided by the Canada-United States-Mexico Agreement (CUSMA) toward a landscape of restrictions. Recent developments include:

  • The U.S. effective tariff rate on Canadian imports rose from 5.3% to 7.7%.
  • Canadian retaliatory tariffs increased the rate on U.S. imports from 1.6% to 3.0%.
  • A major August 2026 escalation impacted roughly C$27.6 billion in goods.
  • Recent U.S. import bans have targeted approximately US$1 billion of Canadian products.

What is the long-term impact?

While some sectors have shown resilience due to commodity prices and global growth, economists warn of deeper structural shifts. Jimmy Jean, chief economist at Desjardins Group, noted that businesses may move from a "wait-and-see" approach to permanent changes.

This transition could mean companies decide to diversify export markets or, more severely, cancel expansion projects and close facilities. Jean suggested that if businesses view these deteriorating relations as permanent, the damage could extend beyond the duration of a typical recession.

Why does this matter for the economy?

Although the most recent U.S. tariffs affect about 5% of Canadian exports, the ripple effects are significant. The PBO has integrated these findings into its wider Economic and Fiscal Outlook, which has already seen downward revisions for 2026 and 2027 forecasts. The primary concern is whether companies will adapt by refocusing operations or by permanently scaling back their presence in the North American market.

FAQ

What caused the recent spike in tariffs?

Tensions worsened after talks for a fresh, wide-ranging trade agreement failed during the summer of 2026.

Will these tariffs affect all Canadian goods?

No, but recent measures have expanded to cover a wide range of industrial, consumer, and agricultural products.