U.S. President Donald Trump has imposed a 25 per cent tariff on most Canadian goods . A senior governmental official said they are expected to come into effect on Feb. 4.
Authors
- Sylvanus Kwaku Afesorgbor
Associate Professor of Agri-Food Trade and Policy, University of Guelph
- Naduni Uduwe Welage
PhD Candidate, Department of Food, Agriculture, and Resource Economics, University of Guelph
- Promesse Essolema
Research Associate, Department of Food, Agricultural, and Resource Economics, University of Guelph
This tariff will have significant economic consequences on both sides of the border, as the U.S. and Canada share one of the largest bilateral trade relationships in the world .
A key concern is the highly integrated supply chains between the two countries . Many goods cross the border multiple times as intermediate inputs before becoming final products . Imposing tariffs at any point in this supply chain will raise production costs and increase prices for a wide range of goods traded between the U.S. and Canada.
For Canada, the tariffs on Canadian products will significantly affect Canada's competitiveness in the U.S. market by driving up prices. Such tariffs could pose serious challenges for various sectors in Canada, given the country's heavy reliance on the U.S. economy.
Effects on different sectors
The impact of U.S. tariffs on Canadian prices is likely to differ across sectors and products, depending on their reliance on the U.S. market.
Sectors with a higher dependence on U.S. trade are likely to experience more severe disruptions. If the tariffs make certain products uncompetitive, Canadian producers may struggle to secure alternative markets in the short term.
Industries such as agriculture, manufacturing and energy will experience varying degrees of impact. Energy products and motor vehicles, which represent Canada's largest exports to the U.S. , are expected to be among the most adversely affected.
In the agricultural and forestry sector, wood and paper products, along with cereals, are among Canada's largest exports to the U.S., with the U.S. accounting for 86 to 96 per cent of these exports, according to data from the World Integrated Trade Solution .
In the energy and mineral sector, crude oil is Canada's top export, reaching US$143 billion in 2023, with 90 per cent destined for the U.S. Given its critical role as Canada's largest export across all sectors, it is not surprising that Trump has noted crude oil would subject to a lower tariff of 10 per cent .
Canada's dependence on U.S. trade
When examining the impact on different products, it's not only the value of trade that matters, but also the share of trade. The share of trade indicates how reliant Canada is on the U.S. compared to other markets.
A high trade share with the U.S. suggests a product is particularly vulnerable to trade disruptions, as Canada depends heavily on the U.S. market for that product. Conversely, a lower share indicates that Canada has diversified suppliers, which reduces its dependence on the U.S.
For instance, in 2023, Canada's top exports to the U.S. included vehicles and parts, nuclear machinery and plastics, according to data from the World Integrated Trade Solution . The U.S. accounted for 93 per cent of vehicle and parts exports, 82 per cent of nuclear machinery exports, and 91 per cent of plastics exports.
This data highlights Canada's extreme dependence on the U.S. market, making these industries within the manufacturing sector highly susceptible to the tariff. This could harm jobs in the manufacturing sector, which is vital to employment in Canada, providing jobs for over 1.8 million people .
Canada's reliance on the U.S. is also evident in imports. In 2023, vehicle imports totalled US$92 billion, with the U.S. accounting for 58 per cent of that amount.
The dependence is also evident in the agri-food and forestry sector, where Canada heavily relies on U.S. imports. This suggests that retaliatory tariffs on agricultural goods from the U.S. could have a substantial impact on food prices in Canada.
Retaliatory tariffs and inflationary pressures
Canada has announced it's imposing $155 billion of retaliatory tariffs on U.S. imports in response . This could contribute to inflationary pressures within Canada.
Prime Minister Justin Trudeau says this includes immediate tariffs on $30 billion worth of goods as of Tuesday, followed by further tariffs on $125 billion worth of American products in 21 days' time to "allow Canadian companies and supply chains to seek to find alternatives."
This will include tariffs on "everyday items such as American beer, wine and bourbon, fruits and fruit juices, including orange juice, along with vegetables, perfume, clothing and shoes," and also on major consumer products like household appliances, furniture and sports equipment, and materials like lumber and plastics.
Given Canada's significant dependence on U.S. imports, the retaliatory tariffs will raise the cost of American goods entering the country, further driving up consumer prices and exacerbating inflation.
In its latest policy rate announcement , the Bank of Canada warned of the severe economic consequences of Trump's tariffs, highlighting their potential to reverse the current downward trend in inflation.
What should Canada do now?
Canada must extend its economic diplomacy efforts beyond the Trump administration, engaging with the U.S. Congress and Senate to advocate for the reconsideration of tariffs on Canadian goods. The Canadian government should persist in leveraging this channel to push for a reversal of the tariffs. This kind of broader negotiation remains the most effective approach to mitigating trade tensions and ensuring stable economic relations with the U.S.
At the same time, Canada must reduce dependence on the U.S. market by adopting a comprehensive export diversification strategy. While the U.S. remains a convenient and accessible trade partner, expanding into emerging and developing markets would help mitigate risks and create more stable long-term trade opportunities.
One effective way to achieve export diversification is by expanding free trade agreements (FTAs) with emerging and developing economies. Currently, Canada has 15 FTAs covering about 51 countries , but there is room for expansion. However, signing FTAs alone is insufficient; Canada must ensure these agreements translate into tangible trade growth with partner countries.
International politics is increasingly shaping global trade, making it imperative for Canada to proactively manage diplomatic and trade relations. In recent years, tensions have emerged with key partners such as China , India and Saudi Arabia . These countries could all become potential markets for Canadian products. Given that China is Canada's second-largest export destination , there is significant potential to expand trade ties.
Additionally, countries like the United Arab Emirates present promising markets, particularly for agricultural products, as the UAE imports about 90 per cent of its food .
Boosting innovation and productivity
Canada stands at a critical juncture in its trade relationship with the U.S. While diplomatic efforts remain essential to averting harmful tariffs, they cannot be the country's only line of defence.
Boosting productivity is one of the most effective ways for Canada to improve its competitiveness in global markets. Canadian producers should prioritize innovation and the adoption of advanced technologies to enhance efficiency and maintain a competitive edge, particularly as they seek to expand beyond the U.S.
In response to potential U.S. tariffs, the Canadian government should implement a bailout strategy to provide short-term relief and mitigate revenue losses to firms that will be mostly affected. Additionally, Canada should leverage its embassies and consulates worldwide to promote exports and help affected firms identify and access new market opportunities.
By doing this, Canada can position itself as a more self-reliant and competitive player in the global economy - one less vulnerable to shifting U.S. policies.
Sylvanus Kwaku Afesorgbor receives funding from the OMAFRA and the USDA. He is affiliated with the Centre for Trade Analysis and Development (CeTAD Africa).
Naduni Uduwe Welage and Promesse Essolema do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
