A trade war is underway. Tariffs from President Donald Trump’s Executive Order of February 1 were in effect as of 12:01 am eastern time this morning. In Canada, the federal government has announced that the counter measures it outlined before the pause will also be implemented. This comes after a 30-day pause on the imposition of blanket tariffs on Canadian goods entering the United States ended without a resolution.

This means that there is now a 25% U.S. tariff on Canadian goods imported into the U.S. except for energy products and critical minerals which are subject to a 10% tariff. Despite measures taken by Canada including the appointment of a border Fentanyl Czar and a $1.3 billion-border security plan, the official reason for the tariffs is to address the flow of illicit drugs into the United States via Canada.

It also means that U.S. goods imported into Canada worth about $30 billion are now subject to a Canadian tariff of 25% with an additional list of products worth $125 billion added by March 25.

A 25% tariff on all Mexican goods also took effect and the tariff on Chinese imports has been doubled to 20%. Over the weekend, Trump ordered an investigation into lumber and “derivative products” that could lead to tariffs on Canadian wood products in addition to an existing 14.5% levy and the 25% blanket tariff that took effect today.

President Trump said on Monday that he would impose a tariff on “external” agriculture products starting April 2. It's unclear how this tariff will apply and whether it will be stacked on top of the 25% tariff on agriculture products already in place.

Trump previously announced a 25% tariff on steel and aluminum imports from all countries effective March 12 that will result in a 50% combined charge on Canadian aluminum and steel.

Finally (at least for now), the President announced last month that the U.S. will impose reciprocal tariffs on goods entering the country starting April 2: “On trade, I have decided, for purposes of fairness, that I will charge a reciprocal tariff, meaning, whatever countries charge the United States of America, we will charge them - No more, no less!” This could include the U.S. matching value-added tax charges such as the GST.

With all these trade actions, it’s hard to believe President Trump has only been in office for less than two months. This timeline by the Peterson Institute for International Economics lists trade actions already taken, covering a range of products (steel, aluminum, copper, lumber, and broad-based) and countries.

With so much news changing by the day, ATB has created a tariff hub with the latest insights and advice.

Initial market reaction

The S&P 500 fell 1.7% yesterday, posting the worst decline so far this year and was down further by 1.4% as of noon EST.

The TSX 60 dipped 1.4% yesterday and was down further by 2.3% as of noon EST.

The exchange rate with the U.S. was US$ 0.689/CDN$ as of noon EST compared to Friday’s close of 0.693.

The WTI oil price dropped to the lowest point so far this year to US$ 67.8/bbl at noon EST, though this also reflects a decision by OPEC+ to increase oil production.

Economic implications for Alberta and Canada

Assuming the tariffs that went into effect today remain in place through mid-2026, our latest tariff scenario sees the Alberta economy slowing to a crawl this year with only 0.5% growth and just over 1% next year. This compares to growth of about 2.5% with tariffs of 10% (excluding energy) without retaliation estimated in December. That is, GDP is lower than the base case by 2.7% by 2027. Relative to our base case, employment is approximately 36,000 lower in 2025 and 60,000 lower in 2026.

Whether this scenario materializes depends on the duration of the tariffs, how other tariff measures stack onto the blanket tariffs and how other countries react. For example, if tariffs persist through all of 2026, we would estimate that there would essentially be no growth in Alberta next year. Moreover, our scenario does not account for additional tariffs that have been proposed, but have not yet come into effect (e.g. lumber, reciprocal tariffs, agriculture, and steel and aluminum).

As for Canada, we expect the economy would effectively grind to a halt, with essentially no growth in the next two years under the tariffs. Should the proposed tariffs persist, the Bank of Canada estimates GDP would be 3% lower than the base case without tariffs by the end of 2026. As Governor Tiff Macklem put it, the “tariffs would all but wipe out growth in the economy for those two years.” While Alberta has higher trade exposure to the U.S. than other provinces, its largest export to the U.S. is energy (80% of total exports to the U.S.) which is subject to a smaller 10% tariff.

We are planning to release a full forecast later this month that includes the new base case for tariffs alongside a high and low case.

Alberta industry analysis

For the oil and gas sector, the burden of the 10% tariff will be shared to varying degrees by U.S. refiners and consumers on the one hand and Canadian producers on the other. Sensitivity analysis by ATB Capital Markets suggests a negative cash flow impact for Canadian producers of up to 7% 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 6% decline in oil and gas investment in 2025 relative to our initial base case assumption without tariffs.

While the oil and gas industry is most dependent on the U.S. (96% of Alberta’s exports of oil, natural gas and refined petroleum products go to the U.S.), our southern neighbour is also the largest export destination for the majority of Alberta’s other industries. There are few options for diverting to other markets, making the tariff difficult to avoid in the near term for many exporters.

Large non-energy sectors in Alberta that are highly exposed to the 25% tariff include:

• Beef and livestock - The North American industry is highly integrated. Nearly all live cattle exports go to the U.S. ($1.4 billion last year). In addition, Alberta feedlots import feeder cattle from the U.S. Countertariffs would significantly raise input costs for feedlots and beef producers. As for fresh and frozen packaged beef, $2.8 billion or about 81% of Alberta’s international beef exports were sent to the U.S. last year.
• Lumber - The industry sent $2.1 billion worth of lumber and other wood products to the U.S. last year (more than 90% of its total international exports). This industry is already subject to 14.5% U.S. duties (recently increased), and now the subject of another inquiry by Trump that could raise tariffs further. 
• Chemicals - This is Alberta’s third largest export category after energy and food. Chemicals are a major input into a variety of industrial and consumer applications. The U.S.-Canada trade in chemicals and plastics is balanced with the U.S. running a small surplus). Tariffs would disrupt supply chains and raise costs.
• Machinery and  metal products - More than three-quarters of machinery exports and over half of metal and fabricated metal products flowed to the U.S. last year. Along with construction, this is an industry that would be highly impacted by Canada’s counter-tariffs, especially if Canada matches both steel and aluminum (25%) and general (25%) tariffs.

U.S. economy

An open question is the durability of the tariffs. Higher inflation and a weakening economy could put pressure on Trump to relent.

Inflation is already running too hot for comfort for the Federal Reserve at 3% in January, which has slowed the pace of interest rate cuts. Tariffs will put further upward pressure on U.S. prices.

• Analysis by Anderson Economic Group indicates that a 25% tariff on Mexico and Canada and a 10% levy on imports from China would raise the cost of a full-sized SUV assembled in North America by $9,000.
• Yale’s Budget Lab estimates that broad-based tariffs on Mexico and Canada would raise the personal consumption price level by between 0.72% and 0.76% for a loss of purchasing power per household of $1,250.
• Modeling by the Peterson Institute for International Economics suggests that inflation will be 0.9 percentage points higher in 2025 with tariffs on Mexico and Canada and full retaliation.  

As for U.S. economic activity, the Peterson Institute estimates a 0.5% hit to GDP relative to the baseline forecast from the tariffs. This comes after reports that the U.S. economy is starting to run out of steam. For example, the Atlanta Fed’s GDPNow is now pointing to a first quarter GDP decline, though this largely reflects rising imports ahead of the tariffs. That said, other indicators like a pullback in consumer confidence and spending also point to a slowdown.

Implications for the Bank of Canada

With tariffs now in place, the Bank of Canada will put more emphasis on recessionary risks following January’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%. The Bank sees inflation rising nearly 0.7 points above its no-tariff case by early 2026 before returning back to the 2% target by 2029.

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 (including a rate cut in March), and falling below that mark later in the second half.  A 1.5% policy rate by the end of 2025 under a prolonged trade war is not out of the question.

Other policy responses

Retaliatory - In addition to the $155 billion phase 1 and 2 countertariffs, the federal government says it’s leaving other options on the table, including non-tariff measures. Some provincial governments (Newfoundland and Labrador, Nova Scotia, and Ontario) have announced they are pulling U.S. liquor from shelves. Ontario has talked about potential energy export restrictions from their province, while Alberta has rejected this as an option.

Competitiveness and productivity - Attention has urgently shifted to measures that are within Canada’s control and improve competitiveness of the national economy. Even before the trade war, Canada was contending with weak levels of business investment and labour productivity. Actions that could be expedited include knocking down internal trade barriers, expanding transportation infrastructure to new markets, tax reform, and streamlining and fast-tracking regulatory approvals for major projects.

Industry and worker support - The federal government has not yet indicated how tariff proceeds will be used, but our sense is that relief to impacted industries and workers will be prioritized. 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.

Background

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

President Trump has 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, and a desire to reshore manufacturing and increase domestic production of things like lumber and steel.

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 February 1 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 and the appointment of a Fentanyl Czar.

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 cost of the tariffs 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 a helpful infographic on how tariffs impact the economy.

Answer to the previous trivia question: In 1951, the first duty free store opened at Ireland’s Shannon International Airport.

Today’s trivia question: Roughly how many trees are there in Canada?