The Trump administration has mostly respected the USMCA, and that’s a big reason why the impact of tariffs on Canada has not been more sharply negative.Christopher Furlong/Reuters
After Mexico got a 90-day extension to continue negotiations with Washington, there was a glimmer of hope that the third amigo in the North American trade pact would get the same treatment. Nope.
Aug. 1 was U.S. President Donald Trump’s deadline for a slew of countries, including Canada, to do “deals” or face a new round of tariffs. The arrangement was basically this: Accept higher tariffs – 15 per cent across the board is the new baseline – or get hit with even higher tariffs. If you retaliate, you’ll also get hit with higher tariffs.
Before July 31 was out, many countries learned that they were on the punishment list. Canada is, with the president ordering a 35-per-cent tariff to go into effect on Friday. The excuse is fentanyl, but don’t take it personally. It’s just a legal pretext, and a thin one at that. The other excuse is that we retaliated.
Canadians had been waiting to find out whether Mr. Trump would follow through on his threat, and now we have our answer. What we don’t know is what happens next.
The unknowns includes what other tariffs Mr. Trump could threaten or impose in the months to come; what exactly he wants from Canada; whether any of the trade walls he’s erecting while bypassing Congress’s constitutional authority will be knocked down by the courts; and how long this one-way trade war against much of the world will last.
But there are some things we know. We know how the Canadian economy is doing in the face of tariffs. And we can predict how it is likely to do in the face of higher or lower tariffs.
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On Wednesday, the Bank of Canada modelled three possible tariff futures, and their impact on this country.
So far, the Canadian economy has been holding up relatively well, under the circumstances. There are a couple of circumstances to keep in mind.
Canada, far more the European Union, China or Japan, is dependent on trade with the U.S. The EU exports about twice as much in goods and services to the U.S. as Canada, but the Canadian economy is one-tenth the size of the EU’s. If the U.S. imposes the same tariffs on Canada and the EU, the harm to Canada will be much greater.
However, Canada is currently subject to considerably lower effective tariffs than most other U.S. trading partners. Even after everything Mr. Trump has announced – from a 25-per-cent tariff, now raised to 35 per cent, to global sectoral levies on steel, aluminum, cars, lumber and some copper products – the bulk of Canadian exports remain shielded.
The reason is the United States-Mexico-Canada Agreement. Royal Bank of Canada estimated that, after Mr. Trump’s first rounds of tariffs, almost 90 per cent of Canadian exports entered the U.S. duty free in April. This week’s modelling from the Bank of Canada assumes that 100 per cent of energy exports and 95 per cent of all other exports are compliant with the USCMA. They still enter the U.S. tariff-free or nearly tariff-free, with the exception of products subject to sectoral tariffs.
We don’t know what tomorrow will bring, but that’s where the central bank believes things stood as of last Sunday. It estimates that tariff-free access to the U.S. for most Canadian goods, combined with high sectoral levies on a short-list of targeted sectors, mean that Canada’s exports to the U.S. face an average 5-per-cent Trump tariff.
That’s considerably lower than the Trump taxes on U.S. imports from most other countries. Imports from China have been hit this year with an average 29-per-cent tariff, while those from the rest of the world face an average Trump tax of 11 per cent, according to the Bank of Canada.
The Trump administration has so far mostly respected the USMCA – though who knows what the future holds – and that’s why the impact of tariffs on Canada has not been more negative. Thursday’s executive order, raising the our-excuse-is-fentanyl tariff to 35 per cent from 25 per cent, continues to apply only to non-USMCA goods. Again, the Bank of Canada says that’s zero per cent of energy exports, and only 5 per cent of the rest.
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The central bank estimates that the economy contracted 1.5 per cent in the second quarter of 2025. But if tariff rates had remained where they were prior to Thursday night, the bank expected modest growth to return in the second half of this year. That story should not be much altered by Mr. Trump’s latest announcement. Again, the additional 10 percentage points of duties applies to less than 5 per cent of Canada’s U.S. exports.
In the Bank of Canada’s tariff “de-escalation” scenario, U.S. levies on China are reduced slightly, those on the rest of the world are lowered more substantially, and tariffs on Canada are cut in half. Canada also gets rid of any retaliatory tariffs, and most other countries do likewise. The result is slightly more robust Canadian economic growth for the remainder of 2025, and growth continuing through to 2027.
But in the “escalation” scenario, the Canadian economy would take a bigger hit. The assumption in this potential future is that U.S. tariffs on the rest of the world go much higher, and there would be more trade retaliation. Canada and Mexico would still enjoy a tariff advantage, but they would each be hit with an across the board 10-per-cent U.S. tariff–with no USMCA exception.
The Bank of Canada says the result would be a Canadian recession this year, followed by a return to growth in 2026.
The good news is that, even under the central bank’s tariff worst-case scenario, our economy would be knocked back only briefly. We would be growing again in just six months. A new round of somewhat higher and considerably broader tariffs from the White House will not put this country into a permanent state of recession. Our economy can find its feet, and relatively quickly.
However, though the Bank of Canada’s model suggest that the wounds would be manageable, it also says that the scars, though small, could be enduring.
The central bank estimates that, by the end of 2027, the country’s gross domestic product would be 1.6 per cent less under the tariff escalation scenario than in the event of de-escalation.
And even the de-escalation scenario has slightly higher U.S. tariffs on Canada than during the pre-Trump era. That means a small but possibly permanent hit to the size of this country’s economy.
The Canadian economy can weather whatever tariffs are thrown at us. But the lower the tariffs, the better.