Trade wars lead to higher prices and slower growth. The rise in prices causes consumers to tighten their belts, concerned about the impact of tariffs on their income and investments. Today, there is a 25% tariff on steel and aluminum exports to the US. This impacts Canada the most as it supplies roughly 80% of US aluminum demand. The EU introduced retaliatory tariffs on US goods in response. Canada added to its retaliation. Recent data suggest the US economy is slowing.

Monetary policy remains restrictive as the real overnight rate (2.75% minus the headline inflation rate) is 85 bps, up from the historical average of 60 bps. Five-year Government of Canada bond yields increased on the news to 2.65% compared to 4.05% in the US. The Federal Reserve is not expected to cut rates when it meets again this month.

Despite relatively strong GDP growth in Canada in the second half of last year, home sales and hiring began to slow in late January due to tariff threats, and more tariffs are yet to come. On March 20, China is expected to impose 100% retaliatory tariffs on Canadian canola oil, while pork and seafood will face a 25% levy. The Chinese tariffs are a push-back against Canada for imposing a 100% levy on electric cars from China and  25% on steel and aluminum.

On April 2, the US announced it will impose reciprocal tariffs on nations that have levied tariffs on US goods. President Trump has also said he is considering imposing retaliatory tariffs on Canadian dairy and lumber.

“We’re now facing a new crisis. The economic impact could be severe depending on the extent and duration of new US tariffs,” Macklem said in his prepared remarks.

Macklem called the uncertainty of the tariff dispute “pervasive” and said that it was “already causing harm.” Officials said the “continuously changing” US tariff threat was hitting consumers’ spending intentions and limiting businesses’ plans to hire and invest.

At the same time, Macklem said the bank “will proceed carefully with any further changes” to borrowing costs, and officials would “need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.”

These are uncertain times. The US is determined to impose worldwide tariffs, disproportionately hitting Canada, Mexico, and China, the US’s top trading partners. This is a misguided neo-Mercantilist policy. Mercantilism assumes that the global economic pie is fixed, so if one country prospers, another must fail. This idea of a zero-sum game was debunked in the 18th century by Adam Smith and others who showed that if countries have a competitive advantage in various products and services, all are better off by producing and trading those products with the rest of the world. It is not a zero-sum game. The economic pie grows with trade. This was the idea behind globalization and the USMCA free trade agreement.

Given Canada’s vulnerability to tariffs, the economy will suffer more than the US, which has a relatively closed economy (where exports are a small proportion of GDP). Prices will rise depending on the duration and size of the coming tariffs, but mitigating the inflation will be the weakness in economic activity. Stagflation, a buzz-word in the 1970s, is back in the lexicon. We expect the BoC to continue cutting the policy rate in 25-bps increments until it reaches 2.25% this June, triggering a rebound in home sales. Layoffs and spending cuts will dampen sentiment, but lower interest rates will bring buyers off the sidelines.

The Wall Street Journal, typically considered a conservative publication, criticized Trump, labelling this as the “dumbest trade war in history.” The Journal stated, “Mr. Trump sometimes sounds as if the US shouldn’t import anything at all, that America can be a perfectly closed economy making everything at home. This is called autarky, and it isn’t the world we live in or one that we should want to live in, as Mr. Trump may soon find out.”

This misguided tariff policy will cause untold damage to the global economy, including the US. Americans will suffer the impact of higher prices and shortages of key products imported from Canada and Mexico. The various North American free trade agreements aimed to improve manufacturing efficiencies and meld the three economies to maximize productivity and the free flow of essential inputs into production. Canada is the number one supplier of steel and aluminum and there are no readily available substitutes for these crucial inputs. A plethora of products and construction activity use steel and aluminum. Aluminum is produced in Quebec where hydroelectricity is plentiful and cheap. US farmers depend on Canadian potash and auto parts, and Canada is the number one exporter of oil and gas to the US.

Consider the US auto industry, which operates as a North American entity due to the highly integrated supply chains across the three countries. In 2024, Canada supplied nearly 13% of US auto parts imports, while Mexico accounted for almost 42%. Industry experts note that a vehicle produced on the continent typically crosses borders multiple times as companies source components and add value most cost-effectively.

This integration benefits everyone involved. According to the Office of the US Trade Representative, the industry contributed more than $809 billion to the US economy in 2023, representing about 11.2% of total US manufacturing output and supporting 9.7 million direct and indirect US jobs. In 2022, the US exported $75.4 billion in vehicles and parts to Canada and Mexico. According to the American Automotive Policy Council, this figure rose 14% in 2023, reaching $86.2 billion.

Without this trade, American car makers would struggle to compete. Regional integration has become an industry-wide manufacturing strategy in Japan, Korea, and Europe. It leverages high-skilled and low-cost labour markets to source components, software, and assembly.

As a result, US industrial capacity in automobiles has grown alongside an increase in imported motor vehicles, engines, and parts. From 1995 to 2019, imports of these items rose by 169%, while US industrial capacity in the same categories increased by 71%. Thousands of well-paying auto jobs in states like Texas, Ohio, Illinois, and Michigan owe their competitiveness to this ecosystem, which relies heavily on suppliers in Mexico and Canada.

Tariffs will also cause mayhem in the cross-border trade of farm goods. In fiscal 2024, Mexican food exports comprised about 23% of US agricultural imports, while Canada supplied some 20%. Many top US growers have moved to Mexico because limits on legal immigration have made it hard to find workers in the US. Mexico now supplies 90% of avocados sold in the US.

Yesterday, the President’s tariff announcement led to an immediate sell-off in stock markets worldwide. Bonds, seen as a safer haven, rallied sharply, taking longer-term interest rates down sharply in anticipation of a meaningful slowdown in economic activity. The Canadian dollar sold off sharply, though it clawed back some of its losses overnight. WTI oil prices dropped 2% yesterday and continued to decline today.

Bottom Line

This is a lose-lose situation and President Trump underestimates the negative fallout of his actions at home and abroad. Retaliation will be swift. Americans will balk at the disruption of supply chains (think waiting for months for a new car) and the increase in the price of many products.

Legendary investor, Warren Buffet, called the tariffs an “act of war.”

Before the tariffs were imposed, we expected roughly 2% growth this year. Assuming the tariffs remain in place for a year, the Canadian economy will plunge into recession. We will likely see a few quarters of negative growth before growth gradually resumes.

Despite the inflation risk, the Bank of Canada will respond aggressively to minimize the meltdown in labour markets and the economy in general. When the Governing Council meets again on March 12, we expect another 25 bps cut in the overnight policy rate, bringing it down to 2.75%. Over the next year, we expect the Bank to continue to ease credit conditions, and a 2.0% overnight rate is likely.

The Canadian 5-year yield, a bellwether for setting fixed mortgage rates, has fallen to 2.51%, its lowest level in nearly three years. Lower interest rates are favorable for housing markets, although the inevitable rise in unemployment and drop in spending will mitigate this effect.

Although sales were down 3.3% month-over-month in January, this was mostly the result of sales trailing off in the last week of the month.

Meanwhile, the number of newly listed homes increased with an 11% jump compared to the final month of 2024. Aside from some of the wild swings seen during the pandemic, this was the largest seasonally adjusted monthly increase in new supply on record going back to the late 1980s.

“The standout trends to begin the year were a big jump in new supply at an uncommon time of year, as well as a weakening in sales which only showed up around the last week of January,” said Shaun Cathcart, CREA’s Senior Economist. “The timing of that change in demand leaves little doubt as to the cause – uncertainty around tariffs. Together with higher supply, this means markets that had been steadily tightening up since last fall are now suddenly in a softer pricing situation again, particularly in British Columbia and Ontario.”

With sales down amid a surge in new supply, the national sales-to-new listings ratio fell to 49.3% compared to readings in the mid-to-high 50s in the fourth quarter of last year. 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 close to 136,000 properties listed for sale on all Canadian MLS® Systems at the end of January 2025, up 12.7% from a year earlier but still below the long-term average for that time of the year of around 160,000 listings.

“While we continue to anticipate a more active spring for the housing sector, the threat of a trade war with our largest trading partner is a major dark cloud on the horizon,” said James Mabey, CREA Chair. “While uncertainty about the economy and jobs will no doubt keep some prospective buyers on the sidelines, a softer pricing environment alongside lower interest rates will be an opportunity for others.”

There were 4.2 months of inventory on a national basis at the end of January 2025, up from readings in the high threes in October, November, and December. The long-term average is 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.

The National Composite MLS® HPI has barely budged in the last year, owing to ongoing softness in B.C. and Ontario. This has offset rising prices on the Prairies, in Quebec, and across the East Coast.

The National Composite MLS® Home Price Index (HPI) changed slightly (-0.08%) from December 2024 to January 2025.

The non-seasonally adjusted National Composite MLS® HPI was unchanged (+0.07%) compared to January 2024. That said, it was technically the first year-over-year increase since last March.

The Bank of Canada’s aggressive rate cuts and regulatory changes aimed at making housing more affordable were offset last month by the increasing uncertainty surrounding a potential trade war with the United States. Tiff Macklem clearly recognizes from this report that significant uncertainty is detrimental to both the Canadian housing market and the broader economy. Our economy teeters on a precarious line between modest growth and recession. Before the tariff threats emerged, it seemed the housing market was poised for a strong rebound as we approached the spring selling season.

Unfortunately, the situation has only deteriorated, particularly as President Trump has repeatedly suggested that Canada could become the 51st state, further angering Canadians. While the first round effect of tariffs leads to higher prices as importers attempt to pass off the higher costs to consumers, second-round effects slow economic activity owing to layoffs and business and household belt tightening.

The Bank of Canada will no doubt come to the rescue slashing interest rates further. This is particularly important for Canada where interest-rate sensitivity is far higher than in the US.

According to Statistics Canada, employment increased by 76,000 last month, bringing the jobless rate down to 6.6%. Economists in a Bloomberg survey expected a smaller rise of 25,000 jobs, with the unemployment rate rising to 6.8%. This pattern of stronger-than-anticipated employment data has continued since November, with increases in both part-time and full-time work.

The employment rate—the proportion of the population aged 15 and older who are employed—increased 0.1 percentage points to 61.1% in January, marking the third consecutive monthly increase. These recent increases follow a period in which employment growth had been outpaced by population growth, resulting in the employment rate declining 1.7 percentage points from April 2023 to October 2024.

Manufacturing employment rose by 33,000 (+1.8%) in January, following an increase of 17,000 (+0.9%) in December. The increase in January was concentrated in Ontario (+11,000; +1.3%), Quebec (+9,700; +1.9%), and British Columbia (+8,700; +4.9%). Despite the gains in the past two months, overall employment in manufacturing changed little year over year in January.

Employment in professional, scientific, and technical services rose in January (+22,000; +1.1%), the second increase in the past three months. On a year-over-year basis, employment in the industry was up by 66,000 (+3.4%).

Employment also increased in accommodation and food services (+15,000; +1.3%), transportation and warehousing (+13,000; +1.2%) and agriculture (+10,000; +4.4%) in January. At the same time, there were fewer people employed in “other services” (which includes personal and repair services) (-14,000; -1.8%).

Many unemployed people are facing continued difficulties finding employment despite recent employment growth.

We expect the BoC to reduce the overnight rate from 3.00% today to 2.5% in quarter-point increments by the spring season. This should significantly boost Canadian housing market activity, particularly given the recent decline in mortgage rates.

Employment in manufacturing may be particularly susceptible to changes in tariffs and foreign demand. The sector has the most jobs dependent on US demand for Canadian exports,

According to the Labour Force Survey, there were 1.9 million people employed in manufacturing in January, comprising 8.9% of total employment—the fourth largest sector in Canada. As a total share of jobs, manufacturing employment has decreased over the years, particularly in the 2000s, but has been more stable since 2010.

Automotive manufacturing industries are highly integrated with US supply chains; an estimated 68.3% of jobs in these industries depend on US demand for Canadian exports. People working in automotive manufacturing (which includes motor vehicle manufacturing, motor vehicle parts manufacturing and motor vehicle body and trailer manufacturing) were concentrated in Southern Ontario, particularly in the economic regions of Toronto (which accounted for 27.7% of all auto workers), Kitchener–Waterloo–Barrie (19.8%) and Windsor-Sarnia (14.8%) in January. In Windsor-Sarnia, automotive manufacturing industries accounted for 38.3% of manufacturing employment and 7.3% of total employment (three-month moving averages, not seasonally adjusted).

In January 2025, a collective bargaining agreement covered over one-quarter (26.5%) of automotive manufacturing employees. In comparison, the union coverage rate in the automotive industry was nearly twice as high in January 2002 (49.9%).

In January, food manufacturing was the most significant manufacturing subsector overall, accounting for 16.4% of all manufacturing employment. It was also the largest subsector across all provinces except Ontario. This subsector relies less on foreign demand, with 28.8% of jobs dependent on US demand for Canadian exports.

The recent acceleration in job growth may not prevent the Bank of Canada from cutting interest rates further this year. The recent wave of hiring likely won’t be enough to placate concerns that a potential Canada-US trade war could plunge the economy into a recession. Still, overnight swap traders eased expectations for a cut at the March 12 meeting to about 60% from close to 80% previously. We expect another 25 bp rate cut at the March and June BoC meetings.

The data were released simultaneously with US nonfarm payrolls, which increased by 143,000 in January as the unemployment rate was 4%. The loonie reversed the day’s loss against the US dollar, trading at C$1.4300 as of 8:34 a.m. in Ottawa. Canada’s two-year yield rose some seven basis points to the session’s high of 2.65%, with Canadian debt underperforming the US and developed markets.

Heightened trade uncertainty will continue to plague Canadian business hiring and spending decisions. Consumers, as well, will likely moderate spending in response to the uncertainty.

On December 14, 2024, a temporary GST/HST exemption on certain goods was introduced. The major categories affected by this tax break included food; alcoholic beverages, tobacco products, and recreational cannabis; recreation, education, and reading materials; as well as clothing and footwear.

On a monthly basis, the CPI dropped by 0.4% in December after remaining flat in November. However, on a seasonally adjusted basis, the CPI increased by 0.2%.

Prices decline for items impacted by the GST/HST break
Approximately 10% of the all-items Consumer Price Index (CPI) basket is affected by the tax exemption.

In December, Canadians paid less for food purchased from restaurants, experiencing a year-over-year decline of 1.6%. This marked the index’s first annual decrease and the largest monthly decline of 4.5%, attributed to the GST/HST break.

On a year-over-year basis, prices for alcoholic beverages purchased from stores fell by 1.3% in December, compared to a 1.9% increase in November. Monthly prices also dropped by 4.1%, nearly tripling the previous largest monthly decline for this series, which was recorded in December 2005 at 1.4%.

The prices for toys, games (excluding video games), and hobby supplies decreased by 7.2% year-over-year in December 2024, a significant drop from the 0.6% decline in November. Additionally, the index for children’s clothing fell by 10.6% in December compared with the same month in 2023.

The shelter component of the CPI grew at a slightly slower pace in December, rising by 4.5% year-over-year, following a 4.6% increase in November. Rent prices decelerated on a year-over-year basis in December, rising by 7.1% compared to a 7.7% increase in November. Since December 2021, rent prices have increased by 22.1%.

The mortgage interest cost index continued to slow for the 16th consecutive month, reaching an 11.7% increase year-over-year in December 2024, the smallest rise since October 2022, which was at 11.4%, as interest rates continued to climb.

Additionally, gasoline prices rose due to base-year effects, and consumers paid more for travel services.

The central bank’s two preferred core inflation measures declined, averaging 2.55% y/y in December. Both core inflation measures dipped m/m in seasonally adjusted terms and are up at a 3+% pace over the past three months.

The inflation report for December 2024 showed a downward distortion due to the sales tax holiday, which will also affect the data for January. However, this effect will reverse in the following months. Core inflation measures are concerning, as the three-month moving average of trimmed-mean and median inflation has risen above 3.0%.

This inflation report is sufficient for the Bank of Canada to cut the overnight rate by 25 basis points to 3.0% on January 29, the date of its next decision.

A significant question remains regarding the potential Trump tariffs, which have been postponed to allow federal agencies time to analyze the trade, border, and currency policies of China, Canada, and Mexico. Trump mentioned yesterday that a 25% tariff would be implemented by February 1. However, government agencies typically do not move that quickly. Moreover, Trump aims to maintain pressure on these countries to ensure a robust response on border control and to reduce China’s influence on manufacturing in Mexico and Canada. The new administration also wishes to prevent Mexico and Canada from selling strategically important products to China.

I believe Trump wants to renegotiate the free trade deal between the US, Canada, and Mexico. Canada has already pledged to tighten its borders and has rejected Trump’s claim that it is exporting fentanyl to the US. I do not expect 25% tariffs on Canada; even if they are imposed, there would likely be Canadian retaliation, making the tariffs short-lived. This is a significant threat.

Some have suggested that tariffs would compel the Bank of Canada to increase interest rates in order to combat inflation. While inflation might initially rise due to tariffs, the long-term effects would likely include layoffs and a marked slowdown in business and consumer spending, leading to increased unemployment. The Bank of Canada’s primary concern would be recession, not inflation.

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.