Key points

• Canadian counter-tariffs are now in place in response to U.S. tariffs.
• The tariffs will put additional pressure on prices at a time of cost of living pressures.
• While the Canadian and Alberta economy should be able to weather the latest tariffs, the risk is that the trade war escalates from here on in. 

What happened?

Canadian counter-tariffs are now in effect, ranging from a rate of 15-50% on approximately $28 billion in imports from the U.S., including steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics.

Canada and the U.S. have not returned to the negotiating table since trade negotiations fell apart last month.

What is the impact on the economy?

It will raise the cost of imports. We estimate that 7-8% of imports from the U.S. are now subject to counter-tariffs.

Some of the impacts on consumer prices are direct—like consumer purchases of household goods, recreation, and food. Other impacts are indirect, meaning the tariffs fall on industrial and capital purchases that raise the cost of production, which will partly be passed onto the consumer.

We estimate that the counter-tariffs will raise inflation by 0.2-0.3 percentage points. This may not seem like much, but keep in mind that inflation is already running too high at about 3%.  Moreover, the Bank of Canada flagged last week there is now upside risk to inflation and the cost of living remains a top concern among Canadians.

In terms of economic output, we expect the combination of new U.S. tariffs and Canadian counter-tariffs will shave roughly half a percentage point off of Canadian GDP growth. In Alberta, the macro impact is smaller (around 0.2 percentage points) due to a lower exposure to U.S. tariffs. However, the province will be impacted by counter-tariffs, which are spread more evenly across the country.

The macroeconomic impacts mask variation under the surface, with some exposed businesses (e.g., honey producers) facing massive impacts. Smaller businesses without the ability to spread costs or find alternative markets will likely face larger impacts.

To illustrate the uneven nature of the counter-tariffs, we show below the value of U.S. imports by tariff rate category (50%, 25% and 15%) using detailed trade data. In many cases, there are alternative foreign sources (e.g. furniture and toys), while in other cases (e.g. railway machinery, trailers) the U.S. is the dominant foreign supplier.

What support is available for impacted businesses?

Some Canadian businesses could be eligible to recover retaliatory tariffs from the federal government. This requires that the imported goods are in short supply locally, that contractual obligations prevent changing suppliers, or that paying the surtax creates exceptional economic hardship.

The federal government has also announced a range of other programs, including payroll and EI support, liquidity and financing and capital grants.

The Alberta government launched an online tariff impact portal for reporting supply chain and operational disruptions, and launched a cabinet committee to target response efforts.

What’s next?

Our base case assumption is that U.S. tariffs and Canadian counter-tariffs remain in place, which will result in a slowdown in growth (but not a recession) and higher inflation.

It’s possible that a trade deal will be made, softening the tariff blow. But it’s also possible that the situation escalates from here. In this dynamic environment, the best we can do is build into our forecast what is known.

We see the Bank of Canada holding at its current policy rate despite higher inflation due to the heightened uncertainty.

We’re looking to see if the U.S. responds. So far there have been threats, including 50% auto tariffs and action against Bombardier, but nothing official in the form of executive orders.

It’s also important to watch what’s happening here at home. Is this even more impetus to fast-track major projects, knock down internal trade barriers and export more overseas? That comes down to execution and, in the near term, there’s no escaping the importance of the U.S.-Canada trading relationship.

Answer to the previous trivia question: It is thought that the connection between teachers and apples originated because many teachers were given apples to help compensate them for their work.

Today’s trivia question: When did the first “public” school open in what was to become the province of Alberta?