TORONTO – Roughly $900 billion in annual trade between Canada and the United States – and with it, traditionally chummy bilateral ties – is on the brink of upheaval, with President Donald Trump threatening to impose sweeping tariffs on Canada as early as this weekend.
Canadian Foreign Minister Mélanie Joly said Wednesday she is “cautiously optimistic” that a year-long diplomatic effort to stave off the levies could still yield results. But the U.S. president is “the ultimate decision-maker,” she added, and can be unpredictable.
The fallout for Canada could be profound. Here’s what to know.
Tariffs could plunge Canada’s economy into a recession
Canada sends nearly 80 percent of its exports to the United States, and millions of Canadian jobs are tied to that trade. Economists project that tariffs of 25 percent, as Trump has proposed, could tip the Canadian economy into a recession, shrinking gross domestic product by 2.6 percent.
“U.S. tariffs in the size that they have been floated, or even, a fraction of that size, could filter into the Canadian economy immediately, significantly and then, persistently for many years,” the Royal Bank of Canada reported last week.
The Bank of Canada, the country’s central bank, reported this month that Canadian firms fear the tariffs will fuel inflation and have “revised down their outlook for sales, investment and hiring.”
Canada’s energy and automobile sectors would be among the hardest hit.
The auto industry relies on an integrated, cross-border supply chain. Automobile parts can cross the border several times before a vehicle is ready for sale. In 2023, about 97 percent of Canada’s crude oil exports went to the United States, making up half of U.S. crude oil imports. Economists project that tariffs on Canadian oil would cause U.S. gasoline prices to rise.
They warn that Trump’s tariffs could significantly increase the prices of many other goods for U.S. consumers. Canada’s retaliatory levies would lead to a depreciation of the Canadian dollar and hurt Canadians by pushing up the cost of U.S. imports.
“It’s mutually assured destruction,” said Christopher Sands, director of the Wilson Center’s Canada Institute.
Trump has offered conflicting justifications for the tariffs
Trump’s myriad justifications for the tariffs have left Canadian officials puzzling over what concessions he wants. That has made “it very hard for Canada to develop a comprehensive response,” Sands said.
At times, Trump has tied tariffs to border security, citing an “invasion” of migrants and fentanyl from Canada. About 1.5 percent of migrants apprehended by U.S. Customs and Border Protection and 0.2 percent of fentanyl seized at U.S. borders in the 2024 fiscal year came from Canada. Still, officials here unveiled a $900 million border plan in December.
“We’re not going to leave the border … as an excuse for them to put [tariffs] on or leave them on,” Dominic LeBlanc, Canada’s finance minister, said in a podcast interview last month. “We’re going to try to remove that from the conversation.”
Trump sought to claim credit for the border plan, and officials here said they received positive feedback from his administration. But the president hasn’t budged.
He has cited other motivations for the tariffs, including the U.S. trade deficit with Canada, which he incorrectly calls a “subsidy” and overstates. In 2023, the deficit was $64 billion, according to the U.S. Census Bureau – far less than the “$200 billion or $250 billion” that he put it at last week and less than its trade deficits with China, Germany, Mexico and Japan.
Economists say the deficit is driven by Canadian energy exports, including crude oil, which the United States buys at a discount. If energy is removed from the equation, the deficit becomes a surplus.
Trump has also pointed to tariffs as a tool to encourage manufacturers to relocate to the United States and to raise revenue.
Howard Lutnick, Trump’s nominee for commerce secretary, said at his confirmation hearing Wednesday that Canada could face a first round of tariffs in the near term if it does not take action on the border – and other levies after agencies have carried out a review of U.S. trade policy by April 1.
Canada is planning to retaliate, but it’s complicated
Canadian officials have used a carrot-and-stick approach, reminding their U.S. counterparts that Canada has critical minerals and energy resources that can help usher in the “golden age” Trump promised in his inaugural address, while also threatening retaliation.
But there are fraught debates here over whether to retaliate – and how.
Officials here are considering levies on billions of dollars of U.S. imports that could initially target goods from swing states or states home to Trump allies, such as Florida orange juice, according to a Canadian official who spoke on the condition of anonymity to discuss a sensitive issue.
Prime Minister Justin Trudeau has promised support to Canadian businesses and workers to help cushion the blow, and he has not ruled out slapping export taxes on Canadian energy or restricting those exports. “Everything is on the table,” he said last week.
That idea is a third rail, particularly in the prairie provinces, and risks undermining national unity.
Danielle Smith, the conservative premier of oil-rich Alberta, favours more diplomacy. She was the only premier to not sign a joint statement with the federal government this month that outlined how Canada might respond because it did not rule out curtailing energy exports.
“We are far more reliant on the trade relationship with them than they are on us,” Smith said this month. “Trying a tit-for-tat tariff war … is not going to go well for Canada.”
Ontario Premier Doug Ford, also a conservative, disagrees. He supports dollar-for-dollar tariffs, pulling U.S. alcohol from shelves and cutting off the province’s electricity exports to the United States as a last resort.
“You can’t bring a knife to a gunfight,” Ford said this month.
Some premiers have sought to downplay the divisions.
“The reality is that we’re a family,” Manitoba Premier Wab Kinew told The Washington Post, “and family is still family – even if one of the cousins doesn’t come to the holiday dinner.”
Trump’s return has scrambled Canadian politics
Trump’s tariff threat has loomed large over the contest to replace Trudeau, who said this month that he intends to resign once a successor is in place in March.
Several high-profile cabinet ministers declined to run in the Liberal Party leadership race, saying that it was in Canada’s best interests for them to stay in their roles and focus on Canada’s response to Trump.
The question of who can best handle the president has dominated that contest, with the front-runners – former Bank of Canada governor Mark Carney and former finance minister Chrystia Freeland – pitching themselves as most qualified to handle the economic tumult of a trade war.
It’s an issue likely to dominate the federal election, which must be held by October, analysts say.
“The Trump presidency is impacting every facet of our lives as Canadians,” said Marci Surkes, Trudeau’s former executive director of cabinet and policy affairs, adding, “It is it is no longer an election about anything else but the relationship with the United States.”