INSIGHT: Trump’s 25% tariff would trigger broad recession in Canada – Oxford Economics
Stefan Baumgarten
29-Jan-2025
TORONTO (ICIS)–A 25% US blanket tariff on all imports from Canada would push Canada into a recession and raise inflation and unemployment, according to analysis from at Oxford Economics.
- Broad recession, big job losses
- Trump unpredictable, uses tariffs to pursue non-trade agenda
- High household debt, low productivity keep weighing on Canada
While President Donald Trump did not go through with his threat of an immediate 25% tariff on Canada and Mexico after taking office on 20 January, he said that a tariff announcement would follow on 1 February, and on Tuesday a White House spokesperson confirmed this.
Speaking on a webinar, Tony Stillo, Oxford Economics’ director for Canada, and economist Michael Davenport outlined the impacts of a worst-case 25% tariff scenario, as well as a more optimistic baseline scenario with a 10% tariff on selected imports.
25% TARIFF WOULD TRIGGER
RECESSION
Oxford Economics’ analysis shows that 25% US
tariffs across the board on imports from
Canada, along with proportional retaliatory
tariffs, would cause Canada’s GDP to fall 2.5%
peak-to-trough by early 2026.
The tariffs could cost Canada more than 150,000 jobs, according to Oxford’s estimates, but the premiers (governors) of Ontario and Quebec have warned of much higher job losses.
Ontario alone, which is the center of Canada’s auto industry, could lose up to 500,000 jobs, the province’s premier has said.
About 1.8 million people, or about 8.8% of Canada’s total workforce, work in sectors that directly depend on exports to the US, according to federal agency Statistics Canada.
Oxford’s Stillo said that a 25% blanket tariff would not only hit the industrial sectors that trade directly with the US but trigger a much larger hit to output via weaker aggregate demand.
Demand would weaken on the back of higher inflation, tighter monetary policy, elevated global uncertainty, and lower business and consumer confidence, he said.
Services sectors such as arts, entertainment and recreation, as well as accommodation and food would see large negative impacts as household budgets would be squeezed and consumer confidence would deteriorate, Stillo said.
In addition, there would be impacts on the construction and homebuilding sector, he said.
The “stagflationary tariff shock” meant that Canada’s central bank, the Bank of Canada, would need to balance concerns over an immediate spike in inflation with a downturn in the economy, Stillo said.
If the bank raises interest rates to address the price shock it would deepen the downturn, he noted.
He added that the uncertainties caused by Trump’s tariff threat were already affecting business confidence and investment plans.
A permanent hike in tariffs would trigger re-shoring from Canada to the US, which was much easier to do than re-shoring from Asia, he said.
According to ICIS analysis, with a 25% tariff Canada’s GDP would see a -1.1 percentage point impact in year one, a -4.3 point impact in year two, and a -3.5 point impact in year three.
TARIFFS AS A TOOL FOR NON-TRADE
PURPOSES
Trump’s trade argument for tariffs was weak,
Stillo said.
In fact, after excluding Canada’s exports of oil and gas, which the US needs, Canada’s merchandise trade surplus with the US was small, he said.
Furthermore, after factoring in the surplus the US has with Canada in services trade, Trump was making a “very self-serving” trade argument against Canada, he said.
For Canada’s chemical and plastics industry, the US is by far the most important market.
The chemicals and plastics sector accounts for more than Canadian dollar (C$) $100 billion (US$69 billion) in annual shipments, with nearly two-thirds of those shipments being exported to the US, according to Ottawa-based trade group Chemistry Industry Association of Canada (CIAC).
Stillo said that Trump’s actions were unpredictable, and his immediate objective may be to force an early renegotiation of the US-Mexico-Canada (USMCA) trade deal. The three countries are due to review the deal in 2026.
Stillo stressed that Trump was using his “favorite toy”, tariffs, to pursue non-trade related objectives.
He went on to note as a recent example Trump’s tariff threat against Colombia in a dispute over the deportation of Colombian migrants.
He also reminded of Trump’s recent threats to use economic force to annex Canada as the 51st US state.
Trump would continue to use the tariff threat to keep Canada “off-balance”, although the full 25% tariff was unlikely to kick in on 1 February, Stillo predicted.
Like Stillo, Canada’s finance minister, Dominic LeBlanc, said on Tuesday that Trump’s policies remained unpredictable, and it was difficult to determine what he wants from Canada.
Trump initially linked his tariff threat to an alleged flow of illegal drugs and migrants from Canada to the US; later he cited the US trade deficit, which he called a US “subsidy” to Canada; and he called on Canada to boost its military spending.
To top it off, he started to belittle Canadian Prime Minister Justin Trudeau as “governor” of the 51st US state.
LeBlanc, speaking to public broadcaster CBC/RDI, said the government had little option but to wait for the expected 1 February announcement and then react accordingly.
Meanwhile, Ottawa was preparing to provide relief for workers and industries that may be affected, he said without disclosing details. According to media reports, the government is preparing pandemic-level relief programs.
Ian Lee, associate professor at the school of business at Ottawa’s Carleton University, said in webcast remarks that it would be “beyond nonsensical” for Canada to take retaliatory measures against the world’s largest economy.
“The idea that we can take on and actually win or hold the US to a stand-still is truly beyond delusional”, he said, adding that only a politician could think this was doable.
Instead of engaging in a tit-for-tat trade dispute with the US, Canada should agree to an immediate renegotiation of USMCA, with the objective of getting a new trade deal that eliminates all tariffs, Lee said.
Philippe Couillard, who was premier of Quebec from 2014 to 2018 and is now an advisor at a consultancy, told CBC/RDI said that given the size of the US economy and Canada’s dependence on the US, Canada could not engage in dollar-for-dollar retaliatory measures.
BASELINE:10% TARIFF
Oxford’s more optimistic baseline assumption is
for a 10% tariff, on about 11% of Canadian
exports to the US – mainly steel, aluminium,
base metals, and dairy products.
Oxford expects those tariffs to be phased in, with marginal negative impacts on employment in Canada.
The tariffs will likely be temporary, lasting until the USMCA renegotiations, Stillo said.
Also, Trump was not likely to put a tariff on the more than 4 million barrels per day of Canadian oil going to US Midwest refineries as this would have “a material impact on the US”, Stillo said.
“We think that in the end, Trump will realize that across-the-board tariffs on Canada and Mexico would harm the US” as well, he said.
Oxford’s current baseline assumptions about the tariffs do “not materially” affect Canada’s economy, Stillo added.
However, Oxford will adjust its assumptions, depending on what Trump may announce on 1 February, he said.
Stillo also noted that most of the legislative tools Trump could use to hike tariffs require up to six months before they can be implemented.
On the other hand, Trump could invoke the International Emergency Economic Powers Act (IEEPA) on 1 February, which allows immediate action, although using IEEPA against Canada may be a “stretch”, Stillo said.
There are also indications that Trump may delay tariff action until after the US Secretary of Commerce delivers a report on trade policies on 1 April, Stillo said.
MANUFACTURING EXPANDS
Surprisingly, Canada’s manufacturing sector
continued to grow for a fourth consecutive
month in December, according to the latest
S&P purchasing managers’ index survey.
Companies reported better export sales to the US last month, driven by inventory accumulation ahead of the expected Trump tariffs.
At the same time, however, the outlook for Canadian manufacturers remains uncertain as long as the shape and extent of the tariffs is unknown, S&P said.
MORE CHALLENGES
Aside from the tariffs, the main challenges
Canada’s economy faces include high household
debt, weak business investment and low
productivity growth, as well as a shrinking
population because of a more restrictive
immigration policy, Oxford’s Michael Davenport
said.
Household debt was much higher than in comparable countries, largely due to Canada’s overvalued housing prices, he said.
Over the past decade, Canada’s economy relied heavily on debt-fueled consumer spending and housing to drive economic growth, which has become “a high-level imbalance”, Davenport said.
At the same time, business investment has been weak since the 2014 oil price slump and has contributed to the sluggish productivity growth and weak per capita GDP growth, he said.
“We think Canada’s lackluster productivity will remain a major theme in 2025 and into the latter half of this decade”, he said.
Furthermore, Canada faces policy uncertainties ahead of a likely change in government, from Trudeau’s Liberals to the Conservatives, he noted.
The opposition Conservatives continue to lead in opinion polls about the election, which must be held before October but will likely be called earlier.
The Conservatives have promised to abolish Canada’s consumer carbon tax. They have also said they would pursue balanced budgets, cut government spending, and reduce the nation’s debt.
Trudeau announced his resignation earlier this month, but he plans to stay on as prime minister until his Liberal party selects a successor, expected by 9 March.
Trudeau also suspended parliament until 24 March, meaning that any legislation to address Trump’s tariffs or other threats cannot be passed immediately.
(US$1=C$1.44)
Please also visit Trump presidency – impact on chemicals and energy
Insight by Stefan Baumgarten.
Thumbnail photo source: Government of Canada
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