An Update on Tariffs: The Potential Impact of a Canadian Retaliation

An Update on Tariffs: The Potential Impact of a Canadian Retaliation

Recent developments in the tariff landscape suggest a slight softening in tone from the Trump administration. Early indications point to Canada potentially being spared the immediate imposition of a 25% tariff on all Canadian exports. However, the situation remains fluid, and the possibility of Canada enacting retaliatory tariffs has become a topic of serious discussion.

While the specifics are still uncertain, we’ve updated our previous modelling to explore the potential impact of a hypothetical 25% retaliatory tariff imposed by Canada on all imports from the United States. Here’s what we found:

1. The United States Takes a (small) Hit :

A retaliatory tariff would increase the price of American goods in Canadian markets, dealing a blow to American exporters and the broader economy. However, a lot of damage was already done in the USA as a result of the initial round of tariffs (remembering that they applied also to Mexican and Chinese imports), and the impact to GDP is only about 10% higher than the scenario without Canadian retaliatory tariffs.

2. A Canadian own goal:

It might feel good to fight back, but it comes at significant economic costs for Canada. In 2023, U.S. exports to Canada totalled approximately US$350 billion. Imposing a 25% tariff on this huge segment of the supply chain nearly doubles the negative GDP impact Canada experiences compared to unilateral tariffs out of the USA, with similarly sized impacts on jobs and investment in Canada.

3. Australia: The Quiet Beneficiary:

As in our earlier analysis, Australia emerges as a minor beneficiary of the tariff wars. By staying under the radar, Australia’s economy could see a (very) modest boost, with GDP benefits increasing slightly from 0.06% to 0.08%. While the absolute gain is small, it underscores the importance of maintaining neutrality in such disputes and the relatively limited domestic impacts.

Conclusion

The potential for a Canadian retaliatory tariff adds another layer of complexity to an already volatile situation. While the instinct to retaliate is understandable, the economic costs—both domestically and abroad—underscore the need for careful consideration. Like to know more? Reach out and continue the discussion.