Montreal, Canada – With less than a month to go until Donald Trump is sworn in as the next president of the United States, the Republican leader is set to usher in a number of serious domestic and foreign policy shifts.
Before Trump’s inauguration on January 20, countries around the world were preparing for another “America First” administration that could radically change their relations with Washington.
For Canada, a key global ally of the United States, the countdown to Trump’s second term was also a countdown to an imminent threat that could upend the Canadian economy and years of strong trade relations between neighboring countries.
Late last month, Trump said he intended to impose 25% tariffs on Canada — as well as Mexico — if the country did not do more to stop illegal immigration and the flow of illicit drugs across its border with the United States.
Trump said on his website, Truth Social, that the plan, which has sparked widespread concern from Canadian politicians, will take effect “on January 20, as one of my first of many executive orders.”
While Canadian Prime Minister Justin Trudeau stressed the need for dialogue and cooperation, Trump’s warning threw Canadian politics into disarray.
Last week, Canadian Finance Minister and Deputy Prime Minister Chrystia Freeland resigned over a disagreement with Trudeau over how to deal with Trump. She said Canada needs to take the tariff threat “seriously” and warned of a “coming trade war” with the United States.
But is a “trade war” really on the horizon? What would a 25% US tariff on Canadian goods and services mean for both Canada and the United States? Will Trump really carry out his threat?
Here’s what you need to know.
First, what exactly did Trump say?
in job On Truth Social on November 25, Trump said he intends to “impose 25% tariffs on Mexico and Canada on all products coming into the United States.”
“This tariff will remain in place until such time as drugs, especially fentanyl, and all illegal aliens stop this invasion of our country!” The Republican president-elect wrote.
“Both Mexico and Canada have the absolute right and power to easily resolve this long-festering problem. We hereby demand that they use that power, and until such time as they do, it is time for them to pay a very heavy price!”
How did Trudeau respond?
The Canadian Prime Minister spoke with Trump the same evening he threatened tariffs.
“We talked about some challenges that we can work on together. It was a good call,” Trudeau told reporters the next morning.
“This is a relationship that we know requires a certain amount of work, and that’s what we’re going to do,” he said, adding that he stressed to Trump the importance of maintaining strong relations between Canada and the United States.
In late November, Trudeau made a surprise visit to Mar-a-Lago, Florida, for talks with the US president-elect about the way forward. The Canadian government also unveiled a series of measures last week that it said would enhance security at the US-Canadian border.
But while the prime minister has urged Canadian opposition leaders and provincial premiers to join a united “Team Canada” approach to the incoming US administration, he remains under pressure to do whatever it takes to avoid tariffs.
How important is the trade relationship between the United States and Canada?
Last year, the United States and Canada exchanged $2.7 billion ($3.6 billion CAD) worth of goods and services daily across their common border, according to Canadian government figures.
“Many of these commodities involve co-investment and co-development making our networks highly complementary.” The government said.
According to US Census Bureau data for 2024, through October, the United States exported more than $293 billion worth of goods to Canada while imports from its neighbor totaled nearly $344 billion.
This made Canada the second largest trading partner of the United States after Mexico, accounting for 14.4% of total trade.
The two countries also signed the United States-Mexico-Canada Trade Agreement (USMCA), a trilateral deal completed during Trump’s first term in office that modernized the long-standing North American Free Trade Agreement (NAFTA).
What commodities are traded?
Canada exports a range of products to the United States, including most notably oil.
Canada is the largest foreign energy supplier to the United States: 60 percent of U.S. crude oil imports came from Canada in 2023, compared with 33 percent a decade ago, according to the U.S. Energy Information Administration research group.
Canada sent about 97 percent of its crude oil exports south of the border last year. The vast majority of these supplies came from the oil-rich province of Alberta.
It also exports cars and spare parts. forest products; Chemicals, plastics and metals to the United States, in addition to electricity supplies.
On the other hand, the goods that Canada imports from the United States are similar to what it exports.
The country imports cars and spare parts, as well as energy products from its southern neighbour. Canada also imports machinery; Transportation equipment, chemicals and plastics, among others.
“Fully integrated supply chains between the United States and Canada exist in dozens of sectors and hundreds of industries.” Roy Norton explainsa global fellow at the Wilson Research Center in Washington, D.C.
“Components made in one country or the other routinely make up part of the final product that rolls off the assembly line in the other country. The effect of this integration has been to keep prices low in both countries, and to enhance the global competitiveness of American and Canadian companies.”
Well, what effects would a 25 percent US tariff have on Canada?
Economists and other experts have been clear that 25% tariffs would hit Canada hard.
“Let’s not kid ourselves,” Trudeau said earlier this month. “Tariffs of 25 per cent on everything going into the United States would be devastating to the Canadian economy.”
Michael Davenport, an economist at Oxford Economics, said:PDF) in a report issued late last November, stated that sweeping 25 per cent US tariffs, coupled with commensurate retaliatory measures by the Canadian government, would push Canada into a recession in 2025.
Davenport said Canadian exports will decline and the country’s gross domestic product will fall by 2.5 percent by early 2026. Inflation is expected to reach 7.2 percent by the middle of next year, and the layoffs of 150,000 workers will raise the unemployment rate to 7.9 percent by the end of 2025.
“Canada’s energy, automotive and other heavy manufacturing sectors will be hardest hit by comprehensive US tariffs due to the high degree of cross-border trade in these industries,” the report said.
“These sectors rely heavily on exports to the United States, but they also get a significant share of their inputs from the United States, making them highly vulnerable to tariffs.”
What about the impact on the United States?
Given the extent of integration between the American and Canadian economies, the United States will be harmed by comprehensive tariffs as well.
The Oxford Economics report said 25% US tariffs and similar retaliatory measures from Canada would push the US into what is known as a “shallow recession,” or when some parts of the economy are doing well while other parts are suffering.
Disruptions to the North American supply chain would harm U.S. manufacturers and local economies.
An October report by the Canadian Chamber of Commerce’s Business Data Lab noted that Canada is the primary export market for 34 U.S. states — making them “surprisingly dependent on Canadian trade.”
For example, Montana’s trade with Canada represents 16 per cent of the state’s economy while Michigan’s trade is 14 per cent, noted Trevor Tombe, an economics professor at the University of Calgary and author of the report. “Even as far away as Texas, trade with Canada still represents 4 percent of the state’s economy,” Tombe said.PDF).
Given what’s being traded between the US and Canada, Trump’s plan “looks like… “Special goal.”
“U.S. imports from Canada are highly concentrated in products that make up a large share of middle-class consumption baskets – oil, natural gas, automobiles, food, and building supplies – meaning tax increases will be very pronounced.” Shamota wrote.
“On the other hand, exports to Canada are often of the higher value-added type…—suggesting that a wide range of businesses in the battleground states could be adversely affected. If the United States raises tariffs to the extent it has threatened— If Canada responds in kind, domestic political backlash could derail a range of important policy projects.
Will Trump carry out his threat?
That remains to be seen, but several experts said they believe Trump is taking positions and does not intend to impose sweeping 25% tariffs on Canada.
Instead, some say the US president-elect hopes to extract concessions from his northern neighbour, especially on longstanding trade and immigration issues.
“It is worth noting that the overwhelming consensus among economists is that higher tariffs, especially on Canada and Mexico, will lead to negative supply chain disruptions in the near term and hurt American businesses and households,” said Mark Ercolau, an economist at TD Economics. a report In late October, just before the US elections.
“We believe the former president would not tolerate a recession or major market shock on his watch, but the net effect of his policies could lead to one.”
Ercolau added that the “most likely scenario” under a second Trump administration is for Washington to seek concessions under the pending review of the US-Mexico Free Trade Agreement, scheduled for 2026.
Davenport, the Oxford University economist, echoed that in his report, saying sweeping tariffs would hurt the U.S. economy and the U.S.-Canada trade relationship, and “are in direct conflict with the USCMA.”
Instead, he said, “Trump is likely to impose targeted tariffs on specific areas that have been central points of contention in Canada-U.S. trade relations in the past.”
“These include steel, aluminum and other base metals, wood and agricultural products such as dairy.”
If US tariffs are imposed, will Canada take retaliatory action?
This is still not clear.
So far, Trudeau has not announced any concrete plans to impose any retaliatory tariffs or other measures on the United States. But the Canadian Prime Minister said his government would “respond to unfair tariffs in a number of ways.”
“We are still looking for the right ways to respond,” he said on December 9.
Citing unnamed officials familiar with the discussions, Bloomberg reported earlier this month that the Trudeau government was considering the possibility of imposing export taxes on key Canadian exports to the United States.
Officials said export tariffs would be a “last resort,” according to the report, while “retaliatory tariffs against U.S.-made goods, and export controls on some Canadian products, would likely come first.”
For his part, Conservative opposition leader Pierre Poilievre, whose party is widely expected to win next year’s federal election in Canada, used Trump’s threat of tariffs to attack Trudeau and demand his resignation.
But Poilievre offered few details on how he would respond to US tariffs if he were prime minister. “President Trump is a deal maker,” he told CTV News on Friday. He added: “He wants America to win, without a doubt.” But I want to show him that Canada can win at the same time. He will put America first; “I will put Canada first.”
When asked what that meant in policy terms, Poilievre added: “What negotiating tools do I have? I can say: Look, Mr. President, if you try to cripple our economy, obviously we will have to respond with counter-tariffs that would hurt the American side.”
