The recent trade war initiated by President Donald Trump has had profound implications for Canada’s economy, which is tightly intertwined with that of the United States.
The extensive shared border and historical trade agreements between these two nations have resulted in Canada’s economic vulnerability to any disruptions caused by changes in U.S. trade policies.
As a significant portion of Canadian exports—about three-quarters—are directed to the U.S., the impact of the trade war is particularly severe, with these exports contributing to nearly one-quarter of Canada’s gross domestic product (GDP).
In 2024, the trade surplus Canada enjoyed with the U.S. was around C$170 billion, largely sustained by American imports of Canadian oil and energy products.
However, when excluding these energy products, the U.S. actually maintained a trade surplus with Canada that year, revealing the complexities in the bilateral trade relationship.
Canada’s trade landscape is dominated by cross-border supply chains, especially apparent in industries such as automotive and energy.
It is estimated that one-third of Canada’s exports to the U.S. in 2024 fell within the oil, gas, and energy category, while motor vehicles and parts accounted for about 15 percent of exports.
Additionally, approximately 17 percent of Canadian merchandise exports were initially produced in the U.S., subsequently processed in Canada, and then re-exported to the U.S., highlighting the intricate interdependencies of North American manufacturing.
The evolution of trade agreements between Canada and the U.S. has been contentious over the years.
The Canada-U.S. Free Trade Agreement (CUSFTA), established in 1988, sparked concerns in Canada regarding national sovereignty and competition from U.S. companies.
Following this, the North American Free Trade Agreement (NAFTA) of 1994 expanded trade provisions and introduced protective measures aimed at minimizing economic disruptions from Mexico’s inclusion.
While studies indicated that the overall impact of NAFTA in the U.S. was modest, localized job losses did occur in specific sectors and regions.
The Trump administration’s USMCA, which replaced NAFTA, was enacted on July 1, 2020, making modifications to dispute resolution, market access for dairy, auto industry standards, and labor protections.
Under Trump’s administration, tariffs on Canadian goods were implemented, which raised concerns about the health of cross-border trade.
Announcing a 50% tariff on aluminum and steel, a 25% tariffs on vehicles, and a 10% energy import tax, the administration continues to reshape trade dynamics.
Although exports under USMCA are currently exempt from these tariffs, this only comprises about 38% of Canada’s exports, leading to an uncertain environment for Canadian businesses.
Following suit, Canada responded with its own tariffs, imposing a 25% duty on certain imports from the U.S., despite limited effectiveness in affecting the U.S. economy due to Canada’s smaller trade footprint.
Canadian officials have also pointed out that the sectors most affected by tariff escalations have faced increased job losses, with significant impacts witnessed in Southern Ontario’s automotive industry.
Bank of Canada Governor Macklem remarked on the diminishing employment rates in industries reliant on exports to the U.S., labeling the uncertainty caused by the trade war as detrimental to hiring and investment intentions.
The long-term economic forecasts for Canada hinge on the persistence of the U.S. tariffs and ongoing retaliatory measures from other nations.
Various studies have put forth predictions regarding the potential decline in Canada’s GDP due to the tariffs, estimating a possible drop between 1¼ and nearly 2 percent by 2027.
The shared economic dependence between Canada and the U.S. raises concerns about the severity of Canada’s reliance on U.S. tariffs, leaving little room for retaliatory responses that would not further hinder Canada’s economy.
As discussions unfold about trade relations and address longstanding irritants, there is a call for Canada to work with the U.S. collaboratively, especially with the USMCA review scheduled for 2026.
Concurrently, efforts to diversify and deepen trade with non-American countries could mitigate the impact of the ongoing trade ward.
The Canadian government has initiated measures to reduce impediments to interprovincial trade, exemplifying the need to enhance Canada’s competitiveness in the global market.
Understanding the precarious nature of trade relations and fostering resilience is vital for Canada’s economic integrity moving forward.
image source from：econofact
