Written by: William Luebkert
The United States has long been Canada’s largest trading partner, and the two have very heavily integrated economies. In 2024, total trade between the two countries totaled $909.10 billion (Office of the United States Trade Representative, n.d.). Nearly $3.6 billion worth of goods and services crosses the U.S.-Canada border every day (Global Affairs Canada, 2025). Since taking power in 2025, the second Trump administration’s new tariff policies have disrupted this heavily integrated flow of commerce. On March 4, 2025, a tariff of 25% on Canadian goods took effect (Lawder and Heavey, 2026). That tariff was struck down alongside countless others as a result of the Supreme Court’s ruling in Learning Resources, Inc. v. Trump on February 20, 2026 (Breuninger, 2026). Despite the ruling, the Trump administration announced the next day the imposition of new 15% tariffs for all countries, including Canada, utilizing a different legal rationale (Lawder and Heavey, 2026). These tariffs have remained in place in some form or another for almost a full year and have already deeply affected the Canadian economy, causing Canadian leadership to start looking elsewhere for trading partners.
Effects of Trump’s Tariffs on the Canadian Economy
In the early stages of the trade war between the two countries, Canadian academics began modeling the forecasted effects on Canadian GDP. A March 2025 study by Cirano projected that a 25% American tariff without Canadian retaliation would contract Canadian real GDP by 3.2% in the initial year after the tariff-induced shock. Likewise, the study forecasted that total employment would fall by 2.3% over the following year, which equates to the loss of 489,000 jobs. For both real GDP and employment, the magnitude of their forecasted changes resembles the effects of the 2008-2009 Great Recession (Martin et al., 2025). The study also predicted that Canadian retaliatory tariffs would have worsened outcomes, though the Carney government had largely abandoned them by late August (Gilles, 2025b).
The end-of-year economic report from Statistics Canada seemed to indicate a greater resilience for the Canadian economy in the face of tariffs compared to the prediction made by Cirano, as the Canadian economy grew by 1.7% over the course of 2025 (The Canadian Press, 2026). Likewise, Canadian employment in 2025 increased by 226,300 on net (Hetrick, 2026). One possible explanation why the Canadian economy outperformed initial trade war expectations could lie in the stipulations of the United States–Canada–Mexico Agreement (USMCA) negotiated by Trump during his first term. The exemption negotiated in that agreement has resulted in over 85% of U.S.-Canada trade remaining tariff-free, limiting much of the overall shock (Gilles, 2025a). Still, the 1.7% GDP growth figure is the lowest for Canada since the COVID-induced recession of 2020, and overall GDP contracted by 0.6% in the last quarter of 2025. Statistics Canada asserts in their report that “Lower exports, particularly to the United States, were the main contributor to the slower rise in GDP in 2025” (The Canadian Press, 2026).
To fully understand the true impact that American tariff policy has had on the Canadian economy, one must analyze the individual industries presently taking the brunt of the tariff costs. According to the Royal Bank of Canada, these industries include auto-manufacturing, aluminum production, iron and steel production, machinery and equipment, and lumber. Those first four industries collectively account for more than 80% of the tariffs the United States collected from Canada over the course of 2025. The Canadian auto industry has experienced the largest tariff-related job losses and a 3% decrease in production year-over-year after bearing 29% of the tariff burden. Aluminum production, as well as machinery and equipment, has demonstrated resilience even as the two industries combined pay 36% of the burden. Iron and steel, accounting for the remaining 21% of the tariff burden, have seen production and employment negatively affected; though lower steel prices worldwide have helped to offset tariff costs. Finally, though one cannot calculate how much it has paid in tariff costs, the 4% decrease in Canadian softwood lumber production and employment in the forestry sector in 2025 follows existing observed multi-year trends, suggesting that tariffs have potentially exacerbated the existing struggles of the Canadian logging industry (Fan and Zheng, 2025).
Looking Elsewhere
Although the effects of American tariffs on the Canadian economy have remained relatively moderate thus far, especially compared to initial forecasts, the Trump administration’s tariff policies have still significantly strained bilateral relations. In March 2025, Prime Minister Mark Carney remarked that “It is clear that the United States is no longer a reliable partner.” He added that he would swiftly initiate efforts to trade more with other countries (The New York Times, 2025). In the year since that statement, the Carney government has signed a variety of new trade agreements with other nations.
Some of the first major international trade actions of the Carney government in the wake of the tariffs concern the United Kingdom and Indonesia. In June 2025, Canada and the U.K. agreed to set up a trade working group that would seek to reduce market access barriers between the two countries and facilitate collaboration between the two nations in areas of digital trade, A.I. infrastructure, and critical minerals (Mukherjee, 2025). In September, Carney followed that up with a new bilateral trade agreement with Indonesia—the first such agreement between Canada and an Association of Southeast Asian Nations (ASEAN) country. The agreement, which took effect in 2026, eliminated tariffs on over 95% of Canadian exports to the country and expanded bilateral cooperation in infrastructure and investment (Prime Minister of Canada, 2025). In 2026, Carney expanded Canadian trade ties with China. He agreed to increase the yearly quota on Chinese electric vehicle imports to 49,000 in the hopes that it would spark Chinese investment in the Canadian auto industry and create new Canadian auto-manufacturing jobs. In exchange, China agreed to lower its tariffs on Canadian canola seeds from 84% to 15%, which will open a new $4 billion market for Canadian canola farmers (Global Affairs Canada, 2026).
Going forward, Carney seems intent on continuing to expand trade relationships in the Indo-Pacific region. As of March 2026, Canada and India are actively negotiating the terms of a free trade agreement they hope to sign by the end of the year. Already, Canada agreed to a $2.6 billion deal to supply uranium to India, and both leaders hope to increase bilateral trade by $50 billion by 2030 (Mukherjee, 2026). By the end of 2026, the Carney government also hopes to finalize a free trade agreement between Canada and ASEAN, the negotiations for which have remained ongoing since 2025 (Rocamora, 2026). As the ever-changing nature of the Trump administration’s tariff policies continues to bring uncertainty to the future of the Canadian economy, the Carney government will likely continue to seek out new foreign trade arrangements to continue “building our strength at home, diversifying our trade abroad, and attracting massive new international investment” (Prime Minister of Canada, 2026).
References
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