The True Cost of the Trump Tariffs

In the coming months, The Conference Board of Canada will continue to release our Canada in a Changing World series, which explores how Canada can build a resilient economy amid a rapidly evolving global landscape. This is one of the series’ first releases, and it examines the implication of a 25 per cent tariff on the Canadian economy.

The impacts would be widespread, especially given Canada’s retaliation. We’ve estimated the impacts of the tariffs on Canada and the U.S. under the following assumptions. 

U.S. impact: be careful what you wish for 

A trade war would have implications for businesses and consumers on both sides of the border. For Americans, the U.S. tariffs would be most apparent in their impact on prices. Given how widespread they are, they would undoubtedly raise the cost of living in the United States. Any business or consumer who buys a product made in Canada, or that has inputs from Canada, would face higher prices. This would be true for everything from houses, to cars, to groceries, to gasoline.  

We also expect that given the intricate cross-border supply chains in the North American auto manufacturing industry the tariffs would lead to shutdowns in some U.S. auto production. The tariffs would make production with existing supply chains uneconomic, and it would take considerable time to shift them to domestic sources. The direct and secondary effects of these shutdowns would be considerable, and the end result is that the U.S. economy would be worse off. We estimate that GDP growth on an annualized basis in the U.S. would be 1.4 per cent lower in the second quarter of 2025, and inflation will increase by 0.2 percentage points in the same quarter. 

Canadian impact: bent, but not broken 

Canada’s initial response is targeted to minimize the impact on Canada’s economy beyond the initial U.S. tariffs. The focus of the retaliatory tariffs is on agricultural products, alcohol and other consumer goods. Canadians should be able to substitute away from these goods relatively easily and given that American products tend to be more expensive than those from other markets. While the second phase of tariffs would hit consumers harder, we expect those selections to also be carefully chosen. 

The result is that it will not be the retaliatory tariffs that drive inflation in Canada. Instead, it will be a weaker Canadian dollar. We expect that inflation will increase by 0.7 points above baseline in the quarter as the loonie falls to 64.4 cents. However, the biggest countervailing force to inflation will be weaker economic growth, creating slack in the economy. Consumers will be more cautious due to a weaker labour market and uncertainty surrounding the economy, putting downward pressure on prices over the three-month period. 

Exports are where the impacts of tariffs on the Canadian economy would be most strongly felt, with real exports in 2025 reduced by 8.0 per cent in the second quarter versus our no tariff scenario. We expect that exports for a wide range of goods would be reduced, but the auto industry is where the effects would be most pronounced, with a decline of 57.4 per cent expected in the second quarter versus the no tariff scenario. 

The drop in exports, and changes in consumer behaviour will have wide ranging implications for the Canadian economy. A summary of the economic of the Trump tariffs for Canada include: 

It is important to note that these impacts assume a temporary implementation of tariffs. The longer the tariffs are in place, the deeper the pain. A scenario of prolonged tariffs would drive a fundamental restructuring of the economy. Business investment, especially in manufacturing, would shift south of the border, reshaping Canada’s industrial structure. 

Where do we go from here 

A tariff of this magnitude to two economies so intertwined has little historical precedent, which makes estimating the impacts challenging. However, one thing is clear, it’s a situation where nobody wins.  

The good news is that we do have some fiscal capacity to manage the impacts of any tariffs in the near term. For example, the federal deficit as a share of GDP is 1.6 per cent, thus we do have some capacity to supplement the income of people who may be negatively affected by a trade war.  We could also prioritize the development of infrastructure projects that improve access to non-U.S. markets and improve our ability to meet domestic demand, providing some much-needed stimulus. 

Canadian households, meanwhile, can shift consumption to local suppliers as much as possible. This will help to offset some of the weaker demand for our products from South of the border. Skipping travel to the U.S. to keep Canadian dollars in Canada would also provide some benefit to both local businesses and the exchange rate.  

Regardless of what happens with tariffs in the coming days, our trust in our ally and economic partner for much of the past 90 years has been broken. Our Southern neighbours have demonstrated that they are willing to wield our exposure to their market as an economic weapon. This change will require a rethink of many elements of our foreign and economic policy.² 

We will provide actionable insights on how we can build a more resilient economy in the coming months. Key areas we will explore include:  

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1. “List of products from the United States subject to 25 per cent tariffs effective February 4, 2025,” The Government of Canada, last modified February 2, 2025.
2. Pedro Antunes, “Trump, Tariffs and Trade,” January 29, 2025.

As the Canada–U.S. relationship is being reset, we’re examining what Canada must do to thrive in this changing world. Get the latest research.