Bank of Canada warns U.S. tariffs could disrupt economies

With the U.S. set to impose a 25 per cent tariff on Canadian goods starting Feb. 1, the Bank of Canada says the move could significantly disrupt both the Canadian and American economies, leading to higher inflation and lower GDP growth.

A new report from the Bank of Canada outlines a hypothetical scenario in which the U.S. imposes permanent 25 per cent tariffs on all imported goods, prompting retaliatory measures from its trading partners, including Canada. The report suggests that such a move could weaken Canada’s trade balance, depreciate the Canadian dollar and reduce business investment.

The analysis finds that U.S. tariffs would make Canadian exports less competitive, leading to a drop in export volumes. Additionally, lower global demand, particularly for commodities like oil, would further strain Canada’s economy. Meanwhile, retaliatory tariffs on U.S. goods would cause Canadian imports to decline, forcing businesses and consumers to seek alternative suppliers.

The Bank of Canada warns that the effects of tariffs would extend beyond trade. Canadian businesses importing machinery and equipment from the U.S. would face higher costs, while consumers could see rising prices due to increased production expenses. The report highlights that Canada’s consumer price index (CPI) inflation would rise over time, as businesses gradually pass on tariff-related cost increases to consumers.

For the U.S., the bank says tariffs would drive inflation higher, as imported goods become more expensive. Additionally, retaliatory tariffs from other countries would hurt American exporters, particularly industries with highly integrated supply chains like the automotive sector.

The Bank of Canada’s modeling suggests that, under a scenario of sustained tariffs, Canadian GDP growth could decline by 2.5 percentage points in the first year and 1.5 in the second year. Over the long term, tariffs would result in a permanent decline in GDP and lower productivity.

The report also considers variations in tariff effects, including scenarios where businesses absorb more costs, delaying price increases, or where tariffs are quickly passed on to consumers, accelerating inflation.

The Canadian Chamber of Commerce also said the impact of U.S. tariffs will be significant.

The chamber said a 25 per cent tariff could shrink Canada’s GDP by 2.6 per cent, costing Canadian households an average of $1,900 annually. For the U.S., tariffs would result in a 1.6 per cent GDP drop, with families losing $1,300 per year. Beyond the economic impact, tariffs would disrupt industries like automotive, agriculture and energy, making everything from groceries to cars more expensive.

“The stakes couldn’t be higher. Tariffs and trade barriers jeopardize jobs, industries, and families across both sides of the border,” said Candace Laing, president and CEO of the Canadian Chamber of Commerce. “The Canada-U.S. Trade Tracker gives us the tools to push back with facts, showing just how much we all stand to lose when imposing taxes on prosperity.

“Trade isn’t just about dollars—it’s about people. While governments might disagree, the ties between our businesses, workers and communities are too important to be collateral damage in political disputes.”

On Jan. 31, U.S. President Donld Trump reiterated his intent to impose 25 per cent tariffs on Canadian and Mexican goods starting Feb. 1. Reports indicated Trump is considering lowering the tariff on Canadian oil to 10 per cent.