Canada is exploring potential retaliatory measures in response to President-elect Donald Trump's recent threat to impose a 25% tariff on all goods from Canada and Mexico, a move that experts warn could severely disrupt trade between the two countries and possibly trigger a recession in both economies.
A Canadian government official, speaking anonymously to CBS News, confirmed this week that the country is evaluating options for counter-tariffs on U.S. imports. However, the official stressed that no final decision has been made. Trump's proposed tariffs, announced earlier this week, would go into effect on his first day in office and are part of his broader plan to curb undocumented immigration and illicit drug trafficking from both countries.
Trump has accused Mexico and Canada of "bringing crime and drugs" to the U.S., and his tariff agenda is part of his broader strategy targeting immigration, aiming to pressure both countries to reduce migration to levels he deems acceptable. In response to Trump's plan to impose tariffs on Mexico "on day one" of his presidency, Mexican President Claudia Sheinbaum vowed that Mexico would retaliate with its own tariffs, warning that "a tariff will provoke a counter-tariff" on U.S. products. His Finance Minister Marcelo Ebrard warned that the U.S. would hurt itself by imposing the tariffs, including car parts and vehicles made for American automakers.
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Trump's tariffs on Canadian goods would target industries critical to the country's economy, including the automotive one. According to economist Michael Davenport from Oxford Economics, these tariffs could push Canada into a recession by 2025, with inflation possibly exceeding 7% and unemployment reaching 8% by the end of the year. Davenport noted that Canada's manufacturing sectors, which rely heavily on exports to the U.S., would be among the hardest hit, with disruptions to supply chains and increased costs due to tariffs on U.S. imports.
Canada has responded to U.S. tariffs with its own countermeasures in the past, including duties on U.S. products like whiskey and yogurt. Canadian officials have expressed frustration with the idea of being lumped together with Mexico in the proposed tariffs but have emphasized their readiness to invest in border security and collaborate with the Trump administration on immigration issues.
While Trump's allies, including his nominee for Treasury Secretary, Scott Bessent, argue that tariffs during his first term helped boost U.S. federal revenue and did not lead to inflation, experts warn that a trade war with Canada could also harm the U.S. economy. A broad tariff on Canadian goods would likely lead to a "shallow" recession in the U.S. and strain relations between the two countries. Canada is a major supplier of oil to the U.S., and tariffs on energy exports could cause a significant rise in U.S. gas prices.
Despite these concerns, experts believe that the Trump administration may limit its tariff actions, targeting specific industries such as steel, lumber, and agricultural products like dairy, rather than imposing broad tariffs on Canadian autos and energy exports, which make up about 40% of total Canadian exports to the U.S.
The potential trade war during the incoming U.S. administration comes with broad implications for the U.S.-Canada relationship and the global economy.
Economists have raised concerns that Trump's broader tariff proposals, including 25% duties on Canadian imports and an additional 10% tax on Chinese goods, could reignite inflation. Goldman Sachs analysts recently estimated that the proposed tariffs could lead to a near 1% increase in inflation.
Despite uncertainties around the potential tariffs, U.S. retailers are already preparing for the worst-case scenario. John David Rainey, CFO of Walmart has already acknowledged the possibility of higher prices for consumers. "We never want to raise prices," Rainey said in an interview with MSNBC. But "there probably will be cases where prices will go up for consumers," he added.
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