New U.S. tariffs on Canada are now in effect after trade negotiations broke down between the U.S. and Canada on Friday. Here's what you need to know:   

Key points

• The U.S. and Canada failed to reach a trade deal on Friday. As a result, 50% U.S. tariffs on certain Canadian exports are now in effect. The federal government has promised dollar-for-dollar Canadian counter-tariffs that will take effect on September 8.
• The tariffs provide a new headwind to the Canadian economy that has only recently started to find its legs. Our initial assessment is that the tariff measures could shave 0.4-0.5% off Canadian real GDP growth. 
• The impacts will vary significantly across industries and regions, widening the regional tariff divide. In general, resource-producing provinces are far less impacted than manufacturing-based provinces. 
• Alberta’s economy is far less exposed to the tariffs than other provinces, namely B.C., Quebec, and Ontario. But the province will still be impacted via supply-chain linkages. We estimate an impact on Alberta real GDP growth of 0.1-0.2%.
• There are other impacts that are more difficult to measure. On the downside, the increased uncertainty over the U.S.-Canada trading relationship, including the potential for further escalation, is likely to have a larger impact than the tariffs themselves. On the upside, fiscal support and efforts to accelerate major projects and diversify exports overseas could provide a partial offset.

What happened?

Late Friday, PM Mark Carney suspended trade talks and directed negotiators in Washington to return to Ottawa. After signs of progress earlier in the week, no deal was reached. PM Carney argued that the Trump administration "asked too much and offered too little." On August 22, PM Carney gave us a glimpse into the state of trade talks prior to their “derailment” and of the concessions the Trump administration was seeking.

In his remarks, he stated a willingness to drop retaliatory tariffs on steel, aluminum, and autos if the U.S. was willing to "substantially" lower tariffs to a level that would make it economical for Canadian companies to export to the United States. PM Carney also stated that he would encourage the provinces to return American alcohol to shelves. And with respect to Canada’s dairy supply management, there was a willingness to look at administrative alignments, but no concessions to the structure or fundamental rules.

However, major points of contention included disagreements on the treatment of Canadian content in vehicles and the U.S. not wanting to include medium or heavy vehicles in the deal. The U.S. also wanted to include terms that would limit the trade deals Canada pursues with other countries. The third factor PM Carney said derailed talks was a disagreement over French language rules.

Canada will retaliate with its own tariffs, matched dollar-for-dollar, the Tuesday after Labour Day. The federal government says details on these counter-tariffs will be shared in the coming days.

Tensions are heating up. This morning, President Trump threatened even more tariffs on autos, auto parts and steel effective January 1.

What new U.S. tariffs are now in effect?

There are 50% tariffs on select goods exported from Canada. The tariffs cover over 500 products, including, but not limited to, alcohol, machinery, plastics, dairy, hockey sticks, and cement. Overall, the tariffs cover roughly $28 billion in Canadian exports, or 5% of Canada’s exports to the U.S.

President Trump is using Section 338 of the Tariff Act of 1930 to impose these tariffs. These tariffs require findings of discriminatory treatment against U.S. commerce, and, critically, do not carve out CUSMA-compliant goods.

How long could this last?

Duration is key when it comes to assessing the economic impacts. For our analysis, we assume that the tariffs remain in place through the rest of 2026 and 2027. But it is also possible that a deal could be reached in the coming days or weeks to suspend these new tariffs. A couple of reasons these tariffs may not last: 

1. The U.S. already has an inflation problem, and these tariffs will add further pressure. With $US 40 trillion in national debt and hyperscalers increasingly coming to the debt market, long-term yields have risen to two-decade heights. Several U.S. governors have spoken out against the tariffs due to the impact on costs.  
2. The tariffs could be challenged in court. This will take time, but recall that last February, the Supreme Court struck down the President’s ability to impose the global ‘liberation day’ tariffs from April 2025 under the International Emergency Economic Powers Act (IEEPA). Another tariff, originally imposed using Section 122 of the Trade Act of 1974, but now under Section 301 of the same Act, replaced the global tariff, but at a much lower rate of 10% for Canadian imports.    

What counter-tariffs will Canada introduce?

PM Carney has promised “dollar-for-dollar” tariffs. So expect to see $28 billion in Canadian tariffs on U.S. goods, or about 8% of total goods imports from the U.S. Based on the PM’s remarks, these tariffs will likely be concentrated in sectors such as steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics. Canada has existing counter-tariffs on U.S. steel, aluminum, and non-CUSMA-compliant vehicles.

What industries are most impacted?

Sectors that are most affected by the tariffs are electrical & industrial machinery, furniture, lighting, plastics & rubber, chemicals & cosmetics, and wood & paper products. The following chart shows the dollar value of exports impacted by product category. For a full list of the over 500 products subject to the 50% tariffs, see here.

How are different provinces affected?

The impacts will be highly regional, disproportionately hitting British Columbia, Quebec, and Ontario based on their higher export exposure to products on the tariff list.

Our estimates of the share of each province’s export exposure to Section 338 tariffs are provided below.  

We then estimate overall effective tariff rates, stacking the Section 338 tariffs onto existing tariffs. It shows that B.C., Quebec, Ontario, and Manitoba face the highest U.S. tariff rates.

As for Alberta, energy products are fully exempt from these tariffs. In general, Alberta has a lower share of exports on the Section 338 tariff list, which limits Alberta’s exposure to approximately $1.5 billion (around 1% of the province's merchandise exports to the U.S.).  

What is the economic impact?

The tariffs raise the effective tariff rate on Canada by about 2.5 percentage points (50% tariffs on about 5% of exports). Layering on counter-tariffs, which raise import costs, we estimate that the combined tariffs will shave 0.1-0.2% from Canadian real GDP growth in 2026 and 0.3-0.4% off growth in 2027 if they remain in effect over this period.

The new tariffs come just as the Canadian economy is starting to find its legs, with a bounce-back in Q2 following two straight quarterly declines. Canada’s economy is already on a permanently lower growth path since the trade war started in early 2025.

These macro impacts do not reflect the hardship that certain businesses will face—those on the tariff list will see the cost of their exports rise sharply, severely curtailing U.S. sales.

As discussed, Alberta is less exposed directly, but it will be impacted via its supply chain linkages to other provinces (e.g. service sectors that supply impacted exporters).

Overall, we see Alberta real GDP lower by about 0.1-0.2% in 2027 relative to our previous base case. The estimated impact on Alberta employment is about 5,000 to 7,000 fewer jobs (roughly 0.15% of total employment).

What could cause the economic impacts to be better or worse than expected?

Downside risks: It’s relatively straightforward to model the impacts of known tariff rates. It’s much harder to capture the uncertainty and its impact on business decisions. We believe trade uncertainty can be more punishing than the tariffs themselves. The ‘on and off’ approach to U.S. tariff policies makes businesses cautious in hiring and deploying capital. While trade uncertainty was already heightened before this latest tariff wave, it’s fair to say the situation has gotten worse and now there is the threat of further escalation.

Upside potential: There are some potential offsets to both the tariffs and the impact of uncertainty. The federal government is promising fiscal support to impacted industries with the PM saying the government will provide “full tariff support” to affected businesses “for as long as it takes.” Details of these measures are expected in the next few days.

Further, the federal government, working with the provinces, could accelerate efforts to build major projects and export more overseas. That was already the game plan, but it remains to be seen whether the latest U.S. tariffs will strengthen that resolve.

Will the Bank of Canada lower interest rates?

It’s possible, but not our base case. The Bank of Canada has acknowledged that new U.S. tariffs could lead to a reduction in the policy rate. But it now has to contend with the inflationary impacts of counter-tariffs and the ongoing war in Iran, which has raised energy prices. While the Bank will tolerate a temporary increase in inflation, it needs to make sure underlying inflation remains anchored at 2%.

Our current view is that the Bank will remain on the sidelines, and that, if anything, the latest tariff action will delay a future rate hike. Our view is that a rate cut would require a significant deterioration in economic conditions.

Backgrounder: What other tariffs on Canada has the U.S. imposed?

In addition to the new Section 338 tariffs, there are two major categories of U.S. tariffs that Canadian businesses are dealing with: 

1. Sweeping 10% tariffs across non-CUSMA-compliant goods using Section 301 of the Trade Act of 1974. These started as 25% tariffs in early April 2025 (‘Liberation Day’) under the International Emergency Economic Powers Act (IEEPA), then were raised to 35%. The Supreme Court struck down the President’s ability to impose these sweeping tariffs last February. The replacement tariffs of 10% are under a ‘forced labour’ provision. These tariffs only apply to goods that are not compliant with CUSMA. The vast majority of goods are compliant and therefore avoid tariff exposure. As such, Canada faced a lower U.S. effective tariff rate than many other trading partners. 
2. Section 232 sector-specific tariffs. The U.S. currently imposes 10-100% tariffs on a range of Canadian imports, such as steel, aluminum, copper, pharmaceuticals, softwood lumber, autos and building materials. These disproportionately impact the manufacturing provinces of Ontario and Quebec, as well as B.C.—the largest lumber producer. Canadian negotiators were hoping to make progress on reducing these tariffs.   

In addition to these tariffs, the lumber industry faces softwood lumber duties of about 35% on top of the 10% Section 232 tariffs.

Answer to the previous trivia question: The 2026 Grey Cup is being held in Calgary on November 15.

Today’s trivia question: Who is Canada’s Chief Trade Negotiator to the United States?