The president had previously pledged to impose tariffs of 10 percent on global imports, 60 percent on Chinese goods, and a 25 percent surcharge on Canadian and Mexican products. Such tariffs would likely disrupt trade flows, increase costs and prices, slow economic activity and provoke retaliatory measures.

An official stated that Trump will instruct agencies to investigate persistent trade deficits and address unfair trade and currency practices by other nations, both of which have been longstanding concerns for him. The presidential memo specifically targets China, Canada, and Mexico, urging agencies to assess Beijing’s compliance with its 2020 trade deal with the US and the status of the U.S.-Mexico-Canada Agreement (USMCA), set for review in 2026.

While the memo does not impose new tariffs, it offers temporary relief for Ottawa and other foreign capitals bracing for immediate, stiff levies from Trump. Instead, the trade policy memo suggests that the incoming administration debate how to fulfill Trump’s campaign promises of widespread tariffs on imports and increased duties for adversaries, particularly China.

A senior policy adviser characterized the memo as an attempt to present a vision for Trump’s trade agenda “in a measured manner,” suggesting that the incoming president is currently adopting a more considerate strategy regarding the topic that fueled his political campaign. The adviser explained that the memo is a framework for potential executive actions that Trump might pursue on trade.

This memo is among several executive actions Trump is expected to sign once he takes office. According to sources familiar with his plans, these actions include declaring a national emergency at the U.S.-Mexico border, rescinding directives from the Biden administration on diversity, equity, and inclusion, and rolling back President Biden’s restrictions on offshore drilling and drilling on federal land.

For weeks, some of Trump’s more traditional economic advisers, such as Treasury Secretary nominee Scott Bessent, have argued that tariffs should not be universally applied—suggesting possible exemptions for specific sectors or gradual implementation of duties. More protectionist advisers, like incoming deputy chief of staff for policy Stephen Miller, have urged Trump to adopt a more aggressive stance by declaring a national emergency, granting him broad authority to raise tariffs significantly. There are ongoing discussions about which sections of US trade law to utilize in addition to a potential emergency declaration.

The memo also alerts Canada and Mexico ahead of the 2026 scheduled review of the updated NAFTA deal signed in 2020. For months, Trump has expressed his intent to renegotiate that deal, seeking assurances from his continental neighbours that they will limit China’s involvement in their economies, especially in critical sectors such as automobiles. The memo’s summary states that federal agencies will “now assess the impact of the USMCA on American workers and businesses and make recommendations regarding America’s participation in it.”

Canadian Sectors Most Vulnerable to Tariffs

The economists at Desjardin recently issued a detailed analysis of the sectors most likely to suffer US tariffs. They conclude that the energy and automotive sectors will likely be exempted from tariffs because no alternative sources can meet US demand. The sectors most likely affected by tariffs are primary metals (including aluminum), food and beverage manufacturing, chemicals, machinery, and aerospace. The transportation and wholesale trade sectors would suffer significant indirect effects from potential tariffs, as would agriculture, fishing and forestry. Industries less exposed to trade should fare better, including many service sectors. However, they could still experience ripple effects of any tariff-induced economic slowdown.

Over 70% of Canada’s goods and services are sold to the United States. Desjardins predicts that Trump will fulfill his promise, but likely with “multiple exceptions.”

The US Energy Information Administration identifies Canada as its top petroleum supplier, followed by Mexico, Saudi Arabia, Iraq, and Colombia. Canada represents nearly 60% of oil imports. Imposing a tax on oil imports would likely raise energy costs in the US, contradicting Trump’s promise to lower energy prices.

The highly integrated automobile sector is another area where the threat of tariffs could create significant issues. The North American auto industry is so interconnected that the tariff would ultimately hurt American manufacturers. Half of the General Motors pickup trucks sold in the US come from Canada or Mexico.

A more targeted approach to tariffs could well emerge. This would align with the experience that Canadian exporters had during Trump’s first presidential term when temporary tariffs were imposed on aluminum, iron, and steel before the Canada-United States-Mexico Agreement (CUSMA) was established.

Currently, US importers are preparing for these potential changes by stocking up on Canadian and other international goods. This trend is expected to continue into the first quarter, as both importers and exporters in Canada and the US await updates from Washington and Ottawa.

Highly Negative Impact

Implementing the tariffs would negatively impact primary metals, food and beverage, chemicals, machinery, aerospace, and parts sectors.

Manufacturers and those in the raw materials sector will require close monitoring. About half of the value of Canadian domestic production in the mining, oil, and gas industry is exported to the US This figure is approximately one-third of the manufacturing sector. Still, it exceeds 50% for the automotive industry and is over 40% in aerospace.

Several other sectors are also identified as “to watch.” These include pulp and paper products, wood products, plastics and rubber products, crop and animal production, fabricated metal products, mining and quarrying, non-metallic mineral products, fishing, hunting and trapping, transportation and warehousing, wholesale trade, forestry and logging, and petroleum and coal products.

Additionally, there is potential for a ripple effect that could impact transportation and warehousing, wholesale trade, and professional services. 

If some of these multinational companies have the option to invest in increasing production in Canada or in their US facilities, it becomes easier for them to decide they’re going to downgrade in Canada because that would mean importing from Canada afterward and incurring extra costs. The risk of reduced investment in Canada is quite real.

63% of Canadian exports to the US are intermediate inputs, while 21% are finished goods. This US dependence on imported inputs is particularly pronounced in three industries: automotive manufacturing, petroleum product manufacturing (made from crude oil, mainly from Canada), and primary metals, which depend on imported mined ores. Even industries such as air transportation and construction depend to a considerable extent on imported inputs (fuel, metal and lumber).

When we look at direct imports and intermediate inputs together, we see that a significant share of US domestic supply and production is dependent on imports, particularly the automotive sector, computers and electronics, electrical appliances, apparel, industrial machinery and primary metals. However, the US’s lower import dependence on certain products makes them more vulnerable to tariffs. These products include wood and paper products, nonmetallic mineral products (with some exceptions, including potash), nonautomotive transportation equipment (including aerospace), and agriculture and agrifood products.

Fortunately for Canada, it would be more difficult for the US to find alternatives for aluminum, pulp and paper, grains and oilseeds, and bakery products, as nearly half of these imports come from Canada. Other sectors are between, with about 30% to 35% of imports from Canada and Mexico. This is the case for iron and steel products, nonferrous metals (excluding aluminum), plastic products and synthetic resins. The aerospace sector is relatively vulnerable, given the availability of European and Asian alternatives. The dynamics in each industry would shift if the US applies tariffs to other supplier countries as well.

Several key products imported from Canada include uranium ore, potash, cobalt, and graphite.

Uranium ore is expected to be exempt from tariffs. Nearly all US demand is met by imports, with Canada supplying 27%. All Canadian uranium mining occurs in Saskatchewan.

Potash, crucial for fertilizers used in agriculture, may also be exempt since it is not mined in the US and alternatives are limited. Canada is the largest potash producer, accounting for 33% of global production, all from Saskatchewan.

Cobalt and graphite are essential for lithium-ion batteries and electronic equipment. China produces 77% of graphite globally, while the Democratic Republic of Congo provides 74% of cobalt. Cobalt mining in Canada is primarily in Ontario and graphite mining in Quebec. The US Department of Defense has invested in Canadian projects to secure these metals, likely leading to tariff exemptions for Canada (Bloomberg, 2024).

Canada’s Response to US Tariffs

The selection of goods for Canada to target is strategic and aimed at creating a political impact. Canadian officials plan to focus on products made in Republican or swing states, where the implications of tariffs—such as job losses and the financial strain on local businesses—could directly affect Trump supporters. The hope is that these allies, including governors and members of Congress, will reach out to Trump to advocate for de-escalation.

Prime Minister Justin Trudeau and his cabinet will convene on Monday and Tuesday in what is being referred to as their “U.S. war room” to respond swiftly if US tariffs are announced. While the detailed list of targeted goods is confidential, it should include various consumer items, including food and beverages, as well as everyday products like dishwashers and porcelain fixtures such as bathtubs and toilets.

Depending on which Canadian goods Trump decides to impose tariffs on and their specific levels, Canada’s second move would be to broaden its tariffs to include additional American products, affecting imports worth 150 billion Canadian dollars from the US. The Canadian government is considering other measures to restrict the export of goods to the United States. This could involve implementing export quotas or imposing duties that American importers would have to bear, particularly for sensitive Canadian exports that the US relies on—such as hydroelectric power from Quebec that is used to supply energy across New England.

Given the relatively abundant domestic production, negotiating exemptions would be more difficult for products that the US does not significantly rely on for imports. This applies to wood products (notably, Canadian softwood lumber is already subject to a countervailing duty of 14.54%), transportation equipment other than automobiles, paper and cardboard products, agrifood items, and petroleum-based products. For these categories, less than 15% of the US supply is sourced from direct imports.

In contrast, imposing a tariff on motor vehicles and parts is less likely since 35% of the supply in the US domestic market consists of direct imports, with 14% coming from Canada and 38% from Mexico. The same pattern holds for industrial machinery and crude oil, which account for 34% and 31% of imports, respectively.

Tariffs are taxes on goods, which are typically passed on to consumers. This makes imported goods more expensive, often leading consumers to stop buying them and ultimately harming the foreign companies that export them. Trade restrictions, such as export quotas, aim to limit the availability of exported goods. They tend to be particularly effective when the importing country lacks accessible or sufficient alternative sources for those goods.

No matter how Canada implements its counter-tariffs or export restrictions, the main goal will be to pressure the Trump administration to retract its commitment to initiating a damaging trade war with its neighbour.

Canada and the United States have a substantial trading relationship, with nearly $1 trillion worth of goods exchanged annually. Canada frequently alternates positions with Mexico as the US’s largest trading partner, largely depending on oil prices.

Certain cross-border industries are deeply interconnected, making tariffs a difficult regulatory barrier for many companies. For instance, a single vehicle can cross the U.S.-Canadian border up to eight times before fully assembled. Implementing tariffs would disrupt auto assembly operations in the United States and Ontario, the center of Canada’s automotive sector.

Canada exports critical resources to the United States, with around 80 percent of its oil and 60 percent of its natural gas heading south of the border. More than half of the oil imported by the US comes from Canada. If the trade conflict escalates significantly, the Canadian government is prepared with additional measures to respond.

This potential third level of escalation in a trade war, which the Canadian government aims to avoid, could involve restricting the export of sensitive commodities valued at hundreds of billions of dollars. These commodities include oil, gas, potash, uranium, and critical minerals—exports vital to the US.

Alberta, known as Canada’s oil-exporting powerhouse, has opposed any measures that would negatively impact its key industry. The divide between the province’s leadership and the rest of Canada could widen if Canada uses oil as leverage against the United States.

Furthermore, a senior official noted that the Canadian government is preparing for a potentially prolonged trade war with the US by supporting domestic industries. The government is considering financial assistance for Canadian businesses severely affected by US tariffs, likely on a case-by-case basis. While large-scale bailouts or blanket funding for entire industries may not be feasible, the official emphasized that it would be unacceptable for a tariff war with the US to result in the loss of thousands of jobs and businesses without government intervention to mitigate the impact.

Economic Impact on Canada of Tariffs and Other Trade Restrictions

Canada and Mexico are much more dependent on trade than the US. Mexico, in particular, produces many manufactured products headed for the US.

However, there are reasons to believe that Trump will not carry out his threats. During his 2016 presidential campaign, Trump repeatedly threatened to impose a 30 percent tariff on Mexico. Once in office, however, he did not impose the tariff but demanded—and received—a renegotiation of the North American Free Trade Agreement (NAFTA). The renegotiation produced a new agreement with a new name—the US-Mexico-Canada Agreement (USMCA)—which modernized the agreement also by tightening rules of origin and lengthening schedules for tariff removal, moving the agreement away from free trade, and earning the new agreement the mocking sobriquet NAFTA 0.7.

Subsequently, in 2019, Trump threatened Mexico with a 5 percent tariff that would gradually increase to 25 percent unless Mexico stopped illegal immigration across the border, but he did not follow through.

USMCA is scheduled for review in 2026, but if the review is expedited to 2025, the tariffs could be avoided by making concessions in the agreement to placate the Americans. If Trump were to impose those tariffs, he would be blowing up (albeit for noneconomic reasons) the contract that his first administration negotiated. Indeed, a telephone call on November 27 with Mexican president Claudia Sheinbaum, which Trump characterized as a “very productive conversation,” seemed to lower the heat. However, Trump’s public musings about using economic coercion to make Canada the “51st state” contributed to Canadian Prime Minister Justin Trudeau’s resignation, and the upheaval in Canadian politics may make resolution via USMCA more difficult.

Tariffs raise prices and reduce economic activity. Businesses that are heavily impacted often respond by cutting jobs, which further slows economic growth. The negative effects can financially strain local businesses and discourage corporate investment in machinery, facilities, and equipment. While it’s unlikely, higher prices could prompt the central bank to temporarily reverse its easing policies. The Bank of Canada understands that the price effects are temporary, but the slowdown in economic activity poses a more significant and lasting problem.

Bottom Line 

The postponement of tariffs suggests that key advisors to Trump are aware of the potential negative impacts that Canadian and Mexican tariffs would have on the U.S. Canada’s agreement to strengthen its border with the US could lead to a temporary reprieve. Mexico faces a bigger challenge than Canada due to its more porous border. It is encouraging that the new US president has started to backtrack on a commitment he made repeatedly before his inauguration. While it remains uncertain whether tariffs are completely off the table or simply postponed, this situation provides us with time to further strengthen our border and address our financial commitments to NATO—two issues that are priorities for Trump.

If tariffs are eventually imposed, which I doubt, we will see a slowdown in economic activity, rising unemployment, and uncertainty that will likely hinder the robust housing market we anticipate this Spring. The new administration’s more measured approach to its trade agenda is certainly positive news. It is likely that the Canada, US, and Mexico trade deal will once again be renegotiated.

The fourth quarter of 2024 saw sales up 10% from the third quarter and stood among the more muscular quarters for activity in the last 20 years, not accounting for the pandemic.

“The number of homes sold across Canada declined in December compared to a stronger October and November, although that was likely more of a supply story than a demand story,” said Shaun Cathcart, CREA’s Senior Economist. “Our forecast continues to be for a significant unleashing of demand in the spring of 2025, with the expected bottom for interest rates coinciding with sellers listing properties in big numbers once the snow melts.”

New listings dipped 1.7% month-over-month in December, marking three straight monthly declines following a jump in new supply last September.

“While housing market activity may take a breather over the winter with fewer properties for sale, the fall market rebound serves as a good preview of what could happen this spring,” said James Mabey, CREA Chair. “Spring in real estate always comes earlier than both sellers and buyers anticipate. The outlook is for buyers to start coming off the sidelines in big numbers in just a few months from now.”

With sales down by more than new listings on a month-over-month basis in December, the national sales-to-new listings ratio eased back to 56.9%, down from a 17-month high of 59.3% in November. The long-term average for the national sales-to-new listings ratio is 55%, with readings between 45% and 65% generally consistent with balanced housing market conditions.

There were 128,000 properties listed for sale on all Canadian MLS® Systems at the end of 2024, up 7.8% from a year earlier but still below the long-term average of around 150,000 listings.

There were 3.9 months of inventory on a national basis at the end of 2024, up from a 15-month low of 3.6 months at the end of November but still well below the long-term average of five months of inventory. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months and a buyer’s market would be above 6.5 months. That means the current balance of supply and demand nationally is still close to seller’s market territory.

The National Composite MLS® Home Price Index (HPI) rose 0.3% from November to December 2024 – the second straight month-over-month increase.

The non-seasonally adjusted National Composite MLS® HPI stood just 0.2% below December 2023, the smallest decline since prices dipped into negative year-over-year territory last April.

The non-seasonally adjusted national average home price was $676,640 in December 2024, up 2.5% from December 2023.

The Bank of Canada’s aggressive rate-cutting and regulatory changes that make housing more affordable have ignited the Canadian housing market. While the conflagration isn’t likely to peak until spring, a seasonally strong period for housing, activity already started to pick up in the fourth quarter.

Today, we saw a welcome dip in US inflation in December. Softer core US CPI inflation in December will give the Fed some breathing room ahead of the uncertain impact of tariffs. With the coming inauguration of Donald Trump, there is an inordinate amount of uncertainty. If Trump imposed tariffs on Canada in the early days of his administration, the Canadian economy would slow markedly, and inflation would mount. This could curtail the Bank of Canada’s easing and even trigger a tightening monetary policy if inflation rises too much.

Market-driven interest rates have risen sharply in recent weeks, pushing the interest rate on 5-year Government of Canada bonds upward. US ten-year yields are at 4.67%, up considerably since early December. Canadian ten-year yields have risen as well, but at 3.44%, they are more than 120 basis points below the US, well outside historical norms.

The central bank meets again on January 29 and will likely cut the overnight policy rate by 25 bps to 3.0%. Canada’s homegrown political uncertainty muddies the waters. The Parliament is prorogued until March as the Liberals decide on a new leader. The subsequent election adds to the volatility and uncertainty. We hold to the view that overnight rates will fall to 2.5% by midyear, triggering a strong Spring selling season.

Prices for food purchased from stores rose 2.6% year over year in November, down slightly from 2.7% in October. Despite the slowdown, grocery prices have remained elevated. Compared with November 2021, grocery prices rose 19.6%. Similarly, while shelter prices eased in November, prices have increased 18.9% compared with November 2021.

Monthly, the CPI was unchanged in November, following a 0.4% increase in October. On a seasonally adjusted monthly basis, the CPI rose 0.1%.
Year over year, gasoline prices fell slightly in November (-0.5%) compared with October (-4.0%). The smaller year-over-year decline resulted from a base-year effect as prices fell 3.5% month over month in November 2023.

Monthly gasoline prices were unchanged in November.

The shelter component grew slower in November, rising 4.6% year over year following a 4.8% increase in October.

Yearly, rent prices accelerated in November (+7.7%) compared with October (+7.3%), applying upward pressure on the all-items CPI. Rent prices accelerated the most in Ontario (+7.4%), Manitoba (+7.9%), and Nova Scotia (+6.4%).

Conversely, the mortgage interest cost index decelerated for the 15th consecutive month in November (+13.2%) after rising 14.7% in October. The mortgage interest cost and rent indices contributed the most to November’s 12-month all-items CPI increase.

This was a mixed report, with headline inflation and the old core indicator dipping to 1.9%, but the Bank of Canada’s preferred measures of core inflation remained sticky at an average of 2.65% y/y. The Bank had been expecting core inflation to average 2.3% for Q4.

The mixed news on the inflation front validates the Bank’s intention to ease monetary policy more gradually, in 25 bp tranches, rather than the 50 bps cuts on the past two decision dates in October and December. The deepening decline in the Canadian dollar- now at 0.6988 cents relative to the US dollar- is another reason for the reduction in rate cuts. The overnight policy rate is still likely to fall from 3.25% today to 2.5% by the Spring. It will decline even further if the economy stalls and unemployment rises further. The overnight rate was at 1.75% before the pandemic.

Rising home sales were broadly based, with the Greater Toronto Area and British Columbia’s Lower Mainland recording double-digit increases in October. The buoyant housing demand was likely the result of the surge in new listings in recent months and the fall in mortgage rates arising from the BoC’s easing. The jumbo rate cut, however, was in the last week of October, likely having little bearing on the monthly data released by the Canadian Real Estate Association this morning. Actual monthly housing activity came in 30% stronger than year-ago levels.

With sales rising considerably in October and new listings falling, the national sales-to-new listings ratio tightened to 58%, up from 52% in September. The long-term average for the national sales-to-new listings ratio is 55%, with a sales-to-new listings ratio between 45% and 65%, generally consistent with balanced housing market conditions.

At the end of October 2024,174,458 properties were listed for sale on all Canadian MLS® Systems, up 11.4% from a year earlier but still below historical averages for that time of year.

As of the end of October, there were 3.7 months of inventory nationwide, down from 4.1 months at the end of September and the lowest level in more than a year. The long-term average is 5.1 months of inventory, with a seller’s market below about 3.6 months and a buyer’s market above 6.5 months.

The National Composite MLS® Home Price Index (HPI) inched up 0.1% from August to September; however, small ups and downs aside, the bigger picture is that prices at the national level have remained mostly flat since the beginning of the year.

The non-seasonally adjusted National Composite MLS® HPI stood 3.3% below September 2023, a smaller decline than the 3.9% declines recorded in July and August. Given the price weakness seen towards the end of 2023, negative year-over-year comparisons will likely continue to shrink.

The strength in home sales in October likely contributes to the expectation that the central bank will cut interest rates by only 25 bps when it meets again on December 11. Of course, their decision will be data-dependent; next week, we will see the October inflation data on Tuesday and retail sales on Friday. The November Labour Force Survey will be released on December 6. The unemployment rate has held steady at 6.5%, and wage inflation remains high. It would take a significant disappointment in these data to trigger another 50 bps cut.

In the meantime, bond yields continue to rise, triggered by the strong Trump victory and the fear that tax cuts and spending increases will boost government debt and deficits. While US long-term yields have risen nearly 80 basis points, Canadian 10-year yields are up less than half that amount. There is an unprecedented gap between economic activity in the US and Canada. The US dollar continues to strengthen, putting downward pressure on the loonie.

Pent-up demand for housing continues to be strong, and the combination of lower short-term interest rates and rising inventories of unsold homes will spur activity as we move into the all-important spring season. By then, the overnight rate, currently 3.75%, could be at least a full percentage point lower.