US-Canada Trade War Escalates, Pushing Canadian Economy Toward Recession

The trade war launched by US President Donald Trump against Canada is expected to hurt businesses on both sides, but experts say the Canadian economy will suffer more as retaliatory tariffs raise the risk of a recession.

On Saturday (August 23), the US imposed a 50% tariff on C$20 billion worth of Canadian goods after bilateral trade talks collapsed. By Monday (August 25), Canadian Prime Minister Mark Carney announced retaliatory measures on more than 700 US products, also worth C$20 billion, with tariffs of 15%, 25%, and 50%, effective September 8. That same day, Trump threatened an additional 50% tariff on all Canadian-made cars starting in January 2027.

Vina Nadjibulla, co-founder and CEO of the Center for State Strategy, a nonpartisan policy think tank in Canada, said Canadian backlash is running strong: "People feel very energized about Canada standing up to Trump, and there's a clear sense of patriotism in Ottawa, but I don't know how long it will last."

Risk of Job Losses

Canada's economy is only one-tenth the size of the US, and it exports about 70% of its output to its southern neighbor, making it especially vulnerable to US trade penalties.

Consulting firm Oxford Economics estimates that US tariffs will shave 0.3 percentage points off Canada's GDP next year, but will cause significant damage to certain provinces and sectors. Manufacturers in Quebec, New Brunswick, and Ontario will be hit hardest, along with exporters in British Columbia due to their heavy reliance on the US market. Discretionary items like cement, paper, lumber, beverages, clothing, plastics, and electronics are on the highest tariff list.

Ashley Kalyn, an international trade consultant at Peacock Tariff Consulting in Toronto, warned: "This is definitely a trade war. We're feeling the effects in Canada and expect to lose up to 100,000 jobs." She also said some of her firm's clients are already planning to close plants and lay off workers if tariffs remain in place.

Escalating Tensions

Tensions ratcheted up further this week when Trump announced that the US government would call Lake Ontario "Lake America" in a jab at Canada. Prime Minister Carney criticized the move on social media, stressing that the name 'Ontario' has Indigenous origins and has existed for over 400 years, predating both Canada and the US. Manitoba Premier Wab Kinew dismissed the renaming as a weak act, comparing it to "a washed-up rock band playing old hits in a casino."

Risk of USMCA Termination

Economists worry that if bilateral relations continue to deteriorate, the US-Mexico-Canada Agreement (USMCA) could be scrapped. Such a scenario would "push the Canadian economy into recession and cause it to permanently descend," warned Tony Stillo, Director of Canada Economics at Oxford Economics.

The USMCA currently shields most Canadian exports from US tariffs, keeping effective tariff rates on Canadian goods at just 5.1%—among the lowest globally. Even with the new duties, that figure is expected to rise only to 6.9%.

Matthew Holmes, Executive Vice President and Chief Public Policy Officer at the Canadian Chamber of Commerce, expressed hope that both sides would soon return to the negotiating table rather than engage in endless retaliation: "A war of attrition benefits no economy. But Canada is showing its resilience."

Auto Industry in Peril

Another worrying area is auto manufacturing. Nearly 18 months ago, Trump imposed 25% tariffs on cars and parts from Canada, though with some USMCA exemptions. Producers and dealers largely absorbed the added costs, keeping new-car prices relatively stable. However, Trump's threat to raise auto tariffs to 50% from 2027 could severely undermine the cross-border auto industry. Bernard Yaros, a US economist at Oxford Economics, noted that the auto industry's "shield" is "wearing thin," and a 50% tariff would disproportionately hurt Midwestern states like Michigan, Ohio, and Indiana that depend on Canadian-made components.

Notably, the timing of the tariff hike appears deliberate—scheduled a few months after the US midterm elections, giving Trump more political breathing room. This could set the stage for a volatile tariff environment in the final two years of his second term.

Impact on Other Stakeholders

Domestically, Trump's latest attacks are also exposing political rifts in Canada. Ontario Premier Doug Ford supports a tough approach, warning that "all options are on the table," including cutting electricity and critical mineral exports to the US. Meanwhile, Alberta and Saskatchewan refuse to impose export tariffs on oil and potash—the economic pillars of those two provinces.

Nadjibulla said the world is watching how Canada handles its increasingly hostile southern neighbor: "Whether Canada can hold its ground matters for other countries too." She also noted that the key date is September 8, when Canada's retaliatory tariffs take effect. "It's hard to predict what will happen. This week's mood is one of escalation," she said.