According to minutes released by the central bank, Canada’s open economy and heavy reliance on exports to the U.S. make it vulnerable to tariffs and trade disruptions.
Projections suggest that while both countries would experience GDP losses, Canada’s would be more pronounced. The Bank of Canada’s governing council noted the negative impact on GDP would not only be immediate but also permanent Growth rates will remain lower until the economy adjusts to new trade conditions.
Concerns over trade tensions prompted the Bank of Canada to cut its policy rate by 25 basis points in late January. This move was intended to support economic growth and mitigate some of the uncertainty surrounding trade relations with the U.S.
The uncertainty was further amplified when U.S. President Donald Trump imposed a 25 per cent tariff on Canadian goods and a 10 per cent tariff on Canadian energy products. Canadian Prime Minister Justin Trudeau announced retaliatory tariffs on $155 billion worth of U.S. goods. A temporary 30-day pause on these tariffs was later agreed upon following negotiations to strengthen border security.
The Bank of Canada’s monetary policy report projected the imposition of widespread tariffs would contribute to a 2.5 percentage point drop in Canada’s GDP. Policymakers highlighted that the trade conflict would put immediate pressure on Canadian export incomes. The Canadian dollar will also be weakened although market conditions will determine how much.
Sustained trade tensions would require ongoing policy adjustments to counteract secondary economic impacts. Policymakers also considered fiscal measures the Canadian government might adopt to balance inflation risks with economic slowdowns.
Even before tariffs were officially imposed, uncertainty had already led businesses to reconsider investments in Canada. The Bank of Canada’s governing council cited survey data indicating that some companies were exploring shifting operations to the U.S. Such shifts would negatively impact hiring, wages, and consumer spending in Canada.
Trade instability has also influenced household and business confidence across North America, with policymakers warning that the longer these uncertainties persist, the greater the economic strain will be. While monetary policy can provide short-term stability, it cannot fully offset the long-term effects of a trade war.
As trade negotiations continue, Canadian policymakers must carefully balance monetary responses with broader economic realities, ensuring that measures are in place to mitigate the long-term consequences of a strained trade relationship with its largest trading partner.
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