Trade tensions re-escalate: Regional implications of proposed U.S. tariffs

The U.S. administration has once again escalated its trade war against Canada. President Trump announced yesterday an additional 50% tariff on certain Canadian goods. There is a lot to unpack. Here is what we know right now, and how we’re thinking about it.

What goods are impacted?

Trump signed three separate proclamations that include new tariffs on Canadian goods including alcohol, dairy, hockey sticks, cement and many others. Like the sector-specific tariffs on steel, aluminum, autos, lumber, and copper, an exemption for goods compliant with the Canada-United States-Mexico Agreement (CUSMA) will not be provided.

Both Canadian energy and potash are exempt from the tariffs, along with fish and critical minerals. Additionally, these new tariffs will not apply to goods already subject to tariffs under Section 232.

When?

If the tariffs aren’t contested or negotiated, the 50% ad valorem duty will become effective as of August 19, 2026.

Prime Minister Carney released an official statement on the tariffs and has spoken with President Trump; the two agreed to intensify negotiations in the coming weeks.

Why?

The Trump administration claims that these new tariffs are designed to counter “Canada’s discriminatory treatment of American products.” The measures come after previous threats by President Trump to impose tariffs in response to the Canadian wildfires.

Earlier this month, the U.S. declined to extend CUSMA for a new 16-year term, making the agreement subject to annual reviews. The U.S. is not currently formally negotiating with Canada, but has begun formal talks with Mexico. The latest measures could be a negotiating tactic to extract trade concessions from Canada.

How?

President Trump is using Section 338 of the Tariff Act of 1930. Last February, the Supreme Court struck down the President’s ability to impose tariffs under the International Emergency Economic Powers Act (IEEPA) which he used to impose the so-called “liberation day” tariffs. The replacement was a global tariff under Section 122 of the Trade Act of 1974 that is set to hit its 150-day expiration this Friday.

The new Section 338 tariffs require findings of discriminatory treatment against U.S. commerce, and, critically, do not carve out CUSMA-compliant goods.

The Trump administration has vowed to employ alternative legal strategies to keep its tariffs in place. Of those alternatives, four possible tariff authorities have been delegated to the President by Congress: Section 232 (already in place for sectoral tariffs), 122 (expiring Friday), 338, and 301 (already in place and includes CUSMA carve-outs). So that only leaves Section 338, which is an untested retaliatory tool.

Which provinces are most impacted?

The impact of the new tariffs, should they proceed, will be very uneven across Canada reflecting the unique mix of each province’s exports to the U.S. 

Sorting out the regional impacts is an arduous task. There are over 500 product categories impacted. We have run the list of products through the Trade Data Online database to develop estimates.

At the national level, our approach yields an estimate that $36 billion worth of goods exported to the U.S. (based on 2025 export data) could be impacted by the new Section 338 tariffs, or about 6% of Canada’s total exports to the U.S. That’s higher than the U.S. government estimate ($20 billion in U.S. dollars, or roughly $28 billion Canadian) mainly because we use the less precise groupings of Harmonized System codes (only 6-digit codes are available through the database as opposed to the 8-digit codes on the U.S. list). Nonetheless, the broader HS codes give an approximation of the provincial distribution of the impacts. 

Our findings suggest that Ontario, Quebec, and British Columbia are most exposed to Section 338 tariffs based on export values and export shares. 

• Ontario’s exposure is related to vehicles and parts tariffs that are non-CUSMA compliant, along with other manufactured goods like beverages and cement.  
• Quebec is exposed through dairy, and select manufacturing products like sporting equipment.  
• B.C. is impacted through wood products and alcoholic beverages. 
• Alberta and Saskatchewan have lower exposure (as a percentage of exports) due to  energy and potash exemptions, while the Atlantic provinces are protected via fish and seafood exemptions.

Initial thoughts

The announcement comes just as the Canadian economy was starting to find its feet in the second quarter after a weak start to the year. The Bank of Canada last week noted that businesses were starting to adjust to the new normal on tariffs.

Once again we find ourselves in scenario land.

The most optimistic take is that the tariffs do not proceed, but talks between the U.S. and Canada accelerate and the countries get closer to a more durable trade deal. 

Another possibility is that the Section 338 tariffs will get dropped within the 30-day window due to court challenges. In that case, the damage is limited to the increased uncertainty caused by the ‘on and off’ trade approach. Businesses will not be hampered by new tariffs, but may be more hesitant to invest and hire as they anticipate that more tariff action could be coming. 

If the Section 338 tariffs do come into force, the impacts will be very uneven, with the provinces of Ontario, Quebec, and British Columbia taking the largest hit due to their higher exposure to the new tariffs. Note that these provinces already had higher exposure to sector-specific tariffs like steel, aluminum, autos and lumber. Alberta will face a relatively small increase in its effective tariff rate due to energy exemptions, and we see minimal aggregate impact. 

The increased uncertainty may be more potent than the tariffs themselves. Moreover, a modest macro impact should not be confused with significant micro, industry-specific impacts like dairy, sporting goods, beverages and autos. 

While this development presents new downside risk to the Canadian forecast, it’s important to not overreact either. We’ve seen this situation play out before where trade tensions flare up and then de-escalate. We’ve learned to not change our forecast after every announcement (and more often than not, our downside tariff scenario never materialized). We are monitoring closely ahead of our next forecast update. 

For the Bank of Canada, this development reduces the odds of a rate hike this year, as trade actions provide economic headwinds. If new trade restrictions were imposed by the U.S., the Bank has previously said it would even consider rate cuts. But we’re not there yet, and we see the Bank taking a cautious, ‘wait and see’ approach.  We continue to see the Bank on hold this year.

Answer to the previous trivia question: Spain won the 2026 FIFA World Cup Final on Sunday, defeating Argentina 1–0 in extra time thanks to a 106th-minute goal by Ferran Torres.

Today’s trivia question: Which U.S. President signed the Smoot-Hawley Tariff Act in 1930?