This article originally appeared in The Hub.
By Trevor Tombe, February 3, 2025
We’re in it now. The U.S. has now launched what the Wall Street Journal has (accurately) called the “dumbest trade war in history.” This move will impose new taxes on American consumers and businesses purchasing goods from Canada and Mexico, while increasing existing tariffs on Chinese imports.
For Canada, the impact is severe: a 25 percent tariff on all goods and a 10 percent tariff on energy. Together, these cover roughly 80 percent of the $600 billion in exports we send to the U.S. each year.
While these tariffs aren’t a direct tax on Canadians, the effects will be felt through reduced demand for our goods. Although we’ll get a clearer picture in the coming days, some quick calculations reveal just how significant the economic hit could be.
If U.S. demand drops in proportion to the tariff (a simple illustration), I estimate it will translate to a $160 billion blow to Canada’s economy—$100 billion in direct losses and another $60 billion in upstream effects.
The pain varies a lot across sectors. Vehicle manufacturing could see demand fall by more than 15 percent, with some subsectors approaching a staggering 25 percent decline. And this likely underestimates (potentially by a lot) the broader disruption to supply chains that crisscross the border.
Other manufacturing industries would face an average demand drop of about 10 percent, while the resource and agriculture sectors would see declines of around 8 percent. Even industries not directly targeted by tariffs, like services, would take a hit. And while the impact on services may seem modest, this sector makes up the bulk of Canada’s economy.
If these output losses translate proportionally to employment, Canada could see roughly 600,000 fewer jobs, potentially pushing the unemployment rate up to nearly 10 percent. While a rough estimate and losses would take quite a bit of time to materialize (on the order of several months or the better part of a year) these figures align with more detailed analyses, including recent work by Scotiabank economists, who also project a three-percentage-point rise in unemployment.
Regionally, I use detailed census data to estimate where the economic and employment hit might be greatest. While all parts of Canada are exposed, the hardest-hit areas would be southeastern Quebec and southern Ontario, where manufacturing is most concentrated.
In response, Canada is hitting back with its own tariffs—starting at 25 percent on $30 billion in U.S. goods and expanding to $155 billion in just three weeks. That covers about one-third of what we import from the U.S. While some specifics are still unclear, this appears to be the most extensive retaliation the government could impose without targeting inputs essential to our own industries.
Make no mistake—this is still a tax increase on Canadians, one that will further slow our economy. But by stopping short of a strict dollar-for-dollar escalation, policymakers have at least avoided inflicting even greater damage on Canadian businesses and consumers. Let’s now hope that economic pain on both sides of the border forces a rethink by the U.S. administration before the damage becomes permanent.
