Economists are warning that a re-escalation in the trade war with the United States puts Canada's burgeoning economic recovery at risk.
The U.S. imposed 50 per cent tariffs on roughly $28 billion worth of Canadian goods over the weekend after trade talks fell apart. The tariff targets, which include cement, honey, alcohol and textiles, amount to roughly five per cent of Canada's exports to the United States.
Bank of Montreal expects the new tariffs will carve half a percentage point off Canada's economic growth as business investment and confidence take a hit.
Before negotiations imploded on Friday, Canada's economy had been showing signs of a rebound. Early reports from Statistics Canada have real gross domestic product on track for solid growth in the second quarter of 2026, coming off a pair of small contractions in the previous two quarters.
"Unfortunately, this breakdown comes just as growth looked to be finding better momentum. Although businesses had been showing signs of looking past tariff headlines, this would be the toughest action since the spring of 2025," said BMO senior economist Robert Kavcic in a note to clients over the weekend.
Prime Minister Mark Carney has pledged to retaliate with dollar-for-dollar tariffs starting Sept. 8.
Bradley Saunders, North America economist at Capital Economics, said in a note to clients Monday that the new tariffs push Canada closer to a recession, particularly if the United States ramps up attacks in response to Ottawa's own retaliation.
In a social media post Monday morning, U.S. President Donald Trump threatened to impose steep 50 per cent tariffs on autos and parts starting Jan. 1, 2027.
Economists say the extent of the overall hit to the economy will depend on the degree of fiscal stimulus from Canadian governments in response to the new U.S. duties.
Saunders said he estimates Canada's effective tariff rate — the average duty facing a Canadian good crossing the border — has now nearly doubled to 5.6 per cent from 2.9 per cent previously. Other economic shops had varying estimates of the new effective tariff rate on Monday, but most put it in the mid-to-high single digits.
"Either way, the upshot is that Canada’s relative tariff advantage over other economies has taken a dent," Saunders said.
Both Saunders and Kavcic noted that there will likely be knock-on effects to the renegotiation of the Canada-U.S.-Mexico agreement, known as CUSMA. Businesses are now more likely to restrain investment decisions amid further uncertainty around the future of free trade in North America, they argued.
Kavcic said the latest trade uncertainty is likely to reinforce the Bank of Canada's decision to remain on hold. While counter-tariffs can stoke inflation, Kavcic argued those pressures would likely be offset by weaker growth in the trade war.
Picture Courtesy: THE CANADIAN PRESS/Dax Melmer
