indicatorThe Twenty-Four

Canada to be hit with punishing U.S. tariffs

Potential implications for Alberta’s economy

By Mark Parsons, ATB Economics 3 February 2025 7 min read

In December, ATB Economics released its economic forecast for Alberta that included a 25% tariff scenario. In today’s Twenty-Four, we update this scenario based on what we learned over the weekend. We will continue to update our analysis as we get more information.

What happened?

On Saturday, February 1, 2025, President Trump signed an Executive Order imposing a 25% tariff on Canadian goods imported into the U.S. and a 10% tariff on energy products.

In response, Canada’s federal government will impose a 25% tariff on $30 billion worth of American goods coming into Canada. After a three-week “public comment” period, the tariff will be applied to an additional $125 billion worth of U.S. exports. Provincial governments have also responded by, for example, not importing U.S. liquor.

What are the potential impacts on Alberta’s economy?

We now have more certainty on the tariffs themselves and countertariffs by the federal government. But there are many unknowns that will ultimately determine the final hit to the economy, namely the duration of tariffs and whether tariff action could be escalated. Even before the tariffs were announced, the heightened uncertainty was hampering business investment.

Those uncertainties aside, it’s useful to illustrate the potential impact of the announced tariffs if sustained.

ATB Economics published a pessimistic, or low case, scenario in December, which assumed a 25% across-the-board tariff and full retaliation by the Canadian government. Our results for the Canadian economy were similar to the impacts presented in the Bank of Canada’s Monetary Policy Report last week.

Updated scenario assumptions

The updated scenario includes a 25% tariff on Alberta’s non-energy exports and a 10% tariff on energy exports, consistent with the Executive Order. As in December, we assume that these tariffs are in place through the first half of 2026. This scenario assumes full retaliation by the federal government on all U.S. imports (only a fraction of imports will initially be subject to countertariffs). In other words, it produces larger impacts than if tariffs are more temporary (a few weeks or months) or if only current federal countermeasures are maintained.

What energy products does the 10% tariff apply to? The new Executive Order references the broad “energy” definition included in Section 8 of the Declaring a National Energy Emergency Executive Order from January 20, which includes oil and gas, refined petroleum products, uranium, coal, natural gas liquids, etc.

In the Statistics Canada trade data, the category “energy products” is a reasonable proxy for the energy exports subject to the 10% tariff. Energy products accounted for 82% of Alberta’s merchandise exports to the U.S. in 2023 (latest annual data available)—by far the highest of any province—and about 28% of Canadian exports to the U.S. (Note that the energy products category includes electricity, which is not mentioned in the U.S. Section 8 description.)

For the oil and gas sector, the burden of the tariff will be shared by U.S. consumers and Canadian producers. Updated sensitivity analysis prepared this morning by ATB Capital Markets suggests a negative cash flow impact for producers of 7% in the worst-case scenario with the impact felt most by heavy oil producers. With wider oil price differentials and higher import costs (including frac sand), we are assuming a 4% decline in oil and gas investment relative to the base case in 2025.

Large non-energy sectors in Alberta that are highly exposed to the 25% tariff include food, chemicals, machinery, and wood products (see chart). The U.S. is the largest market for almost all of Alberta’s industries, making the tariff difficult to avoid by diverting to other markets. For example, 71% of Alberta’s manufactured food product exports went to U.S. buyers in 2023 and 85% of the province’s chemical products. Crop production is one of the least exposed with only 11% of this sector’s international exports going south of the border in 2023.

--

--


Scenario results

The scenario results in modest real GDP growth of only 0.5% in 2025 followed by weak growth of 1.3% in 2026. This is an improvement from our prior scenario under a 25% tariff on energy products, which had a decline in real GDP of 0.3% in 2025.

Under the new scenario, real GDP is estimated to be 2.9% below the base case forecast in 2026, while employment is 2.2% lower than the base case in 2026. The unemployment rate rises to 7.6% by 2026 compared to the base case of 6.5%.

--

--


--

--


Forecast implications

This scenario is not a forecast, but an illustration of what could happen. Duration is key. The longer the tariffs are in place, the more likely it is that businesses will curtail production and reduce investment. A de-escalation of the trade conflict would soften the blow, while an escalation (including non-tariff options) would make the situation worse.

We are closely tracking developments and the upcoming data as we look to revise our forecast for the Alberta economy in March.

Implications for the Bank of Canada

With tariffs now confirmed, the Bank of Canada will put more emphasis on recessionary risks following last week’s rate cut. We think the Bank will see through the transitory impacts on inflation and speed up its rate cuts as long as longer-term inflation expectations remain anchored near 2%.

Before the tariffs were announced, we were already expecting the Bank would cut two more times to 2.5% by mid year. But if these tariffs persist, we see the Bank moving aggressively to a 2% policy rate by mid year, and falling below that mark later in the second half.  A 1.5% policy rate by the end of 2025 under a prolonged trade is not out of the question.

Potential fiscal response

The federal government has not yet indicated how tariff proceeds will be used. Transfers to impacted businesses or households could partially mitigate the economic impact. It is likely that fiscal supports, beyond automatic stabilizers like Employment Insurance, will be more targeted to industries affected than the broad-based transfers used during the pandemic.

Beyond the short-term fiscal response, attention will likely shift to measures that improve the competitiveness of the Canadian economy, and bolster the country's weak levels of  investment and productivity.  Measures could include removing internal trade barriers, expanding transportation infrastructure to new markets, and streamlining and fast-tracking regulatory approvals for major projects.

Background

Why is the U.S. imposing tariffs on Canada?

President Trump has in the past said that the U.S. is subsidizing Canada, citing trade imbalances and military protection. He has also raised concerns over border security including the spread of illegal drugs and migrants.

As we’ve noted, the U.S. trade deficit with Canada represents only about 5% of the total U.S. trade deficit. And excluding energy, the U.S. runs a trade surplus with Canada.  Further, Canada’s exports of discounted crude and natural gas enables the U.S. to run significant energy trade surpluses with other countries.

In justifying the tariffs, the Executive Order references border security, in particular the “influx of illicit opioids.”  It indicates that “Immediate action is required to finally end this public health crisis and national emergency, which will not happen unless the compliance and cooperation of Canada is assured.”

The Canadian federal government notes, however, that only 1% of fentanyl and illegal drugs entering the U.S. crosses the Canadian-U.S. border. Since the initial tariff threat, the federal government has announced a $1.3 billion border security plan.

What are tariffs and how do they impact the economy?

Tariffs are taxes, but in this case they are applied on goods imported into a country.  In the case of U.S. tariffs, the tax is paid by the U.S. importer of Canadian goods.

The tariff will be borne by different parties, including the importing U.S. business (lower profits), the U.S. consumer (higher prices), and/or Canadian exporters (lower demand and prices). For example, a tariff on Canadian oil is likely to be passed onto the U.S. consumer in the form of higher prices, but also on the Canadian oil producer, who over time will face lower demand and lower prices for their output.

The ultimate impact of the tariff depends on how easily substitutes can be found for the tariffed product.If U.S. businesses reduce purchases of Canadian goods because they are more expensive, this hurts the exporter with negative impacts on production and employment.

For more, the Bank of Canada provides an excellent infogram on how tariffs impact the economy.

Answer to the previous trivia question: According to tradition, February and January were added to the Roman calendar during the reign of the second King of Rome, Numa Pompilius (715–672 BC).

Today’s trivia question: Located just south of the Canadian Pacific Railway’s mainline, in what year was Calgary’s Customs House completed?

Economics News

Subscribe and get a quick daily snapshot of what’s happening in Alberta’s economy

Need help?

Our Client Care team will be happy to assist.