America's terrible tariffs could actually be a huge win for Canada's economy

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3 days ago

The whole thing about Canadians is that they're remarkably nice. Except lately, they haven't been feeling so warm and fuzzy, namely toward their neighbors to the south.
Given everything that's going on — President Donald Trump's on-and-off trade war, his remarks about making the country the 51st state — Canada has a right to be annoyed with the United States. If your longtime bestie suddenly turned on you for no apparent reason, you'd be miffed, too. The US's sudden shift to frenemy status is going to cause some pain for Canada in the near term, especially as it stands to be a big economic loser from Trump's tariff tantrum. But ultimately, the turmoil may be a blessing in disguise for the Canucks. It's an opportunity for the country to step out of the star-spangled shadow and do its own thing.
"It's really kind of a decoupling moment that is scary to watch in the short term. In the medium to long term, I have to say, it's an important wake-up call for Canada," says Matthew Holmes, the chief of public policy at the Canadian Chamber of Commerce. "If I look back on this in 20 years, I hope to be able to say that this woke Canada up to the need to be a little more strategic and have a little bit more of its own agency in the economy and in the kind of economy we want."
If the US doesn't want to be as good of friends anymore, fine, Canada can make new, better friends, anyway.
The US and Canadian economies are deeply intertwined. A shared language, geographic proximity, and interconnected supply chains have made the countries convenient strategic partners for decades. Three-quarters of Canada's exports go to the United States, and nearly half of its imported goods come from the US. In 2024, Canada was the third-largest source of imports to the US, behind China and Mexico. Canada was also the top destination for exports from the US. Several of the two countries' biggest industries, including automotives and energy, are highly interwoven with one another.
Trump's belligerent stance toward Canada has thrown the country for a loop. While Canada isn't subject to the 10% blanket tariffs he's placed on imports from other countries, he's targeted specific areas with import taxes, including 50% tariffs on steel and aluminum, 25% tariffs on cars, 10% tariffs on potash and energy, and 25% tariffs on imports not compliant with the US-Mexico-Canada trade deal (formerly known as NAFTA). He's also planning to place a 50% tariff on copper come August. Most recently, the president threatened to put a 35% tariff on imports from Canada, blaming its retaliatory tariffs for the move, though it wasn't immediately clear what goods this would apply to. (The president says this is about fentanyl, though very little fentanyl comes to the US over the Canadian border.) A Trump administration official said in an email that they expected goods currently tariffed at 25% to go up to 35%, though no final decisions have been made by the president. Given Trump's persistent flip-flopping on tariffs, it's not clear whether they will actually take hold. This constant state of flux is making investors, at the very least, a bit more casual about the whole thing. The foreign exchange market, which tracks currency fluctuations, would indicate investors aren't too worried about it — the Canadian dollar isn't swinging based on Trump's pronouncements and has strengthened in recent months.
"The market, so to speak, is seeing through a lot of this rabble-rousing," says Peter Morrow, an economist at the University of Toronto. The TACO trade — which is short for Trump Always Chickens Out and proxy for the idea that the president backs down from his most aggressive threats — is alive in the Great White North, too.
Regardless, the American president's trade antics are taking a toll on Canada. It's the country most hurt by the US trade war so far — the US is second. An analysis from the Yale Budget Lab found Trump's tariffs and Canadian countermeasures could cause Canada's economy to shrink by 2.1% in the long term. The trade dispute increases the chances of a recession in Canada, and it threatens to increase inflation. It also injects an incredible amount of uncertainty into the economy. It's next to impossible for Canadian businesses to plan for the future when they have no idea what the guy in the White House is going to do, day-to-day.
"It's not only the tariff wall; it's kind of a wall of uncertainty that's going up between the two countries," says Julian Karaguesian, a course lecturer in McGill University's economics department. "The immediate effect it's having in the short term is a cooling effect on business investment, which is the dynamic part of the economy."
Canada isn't taking the economic punch in the face lying down. Canada's new prime minister, Mark Carney, and the Canadian public have taken a hockey-esque "elbows up" approach to the US. A "Buy Canadian" movement has swept the nation. Canadians are swapping out American-made products and groceries for national ones, guided by forums and apps that help distinguish locally made goods from their Yankee counterparts. Liquor stores have pulled American whiskeys off the shelves. Instead of going to McDonald's, Canadians are hitting up A&W. They're opening up the CBC Gem streaming app to see what's on there instead of Netflix.
"Brand damage can last a long time. People won't remember in 10 years why they don't like Nike anymore, but they will still think slightly ill of it," a guy who runs a website called Shop Canadian Stuff tells me. He spoke with me on the condition of anonymity, because his job doesn't know about his nationalist side hustle.
Evan Worman, one of the moderators of a Buy Canadian subreddit, tells me that Canadians redirecting their purchasing power is a loss for the US because it's opening people's eyes to the quality of non-American stuff.
"People are going to find a lot of the products that are getting imported from Europe have better safety standards, have higher quality control than the US, and it doesn't come with all the hang-ups and baggage of buying from somebody who wants to invade you," he says. Worman is originally from Alaska and has lived in Canada for a decade. When people don't realize he's not Canadian, he doesn't correct them. "People are genuinely very angry at us right now," he says.
The attacks are also fostering a willingness to reshape the domestic Canadian economy: Local governments are getting rid of internal trade barriers that have prevented goods from flowing between provinces. "We've had, for decades, stupid, unnecessary rules between Canadian provinces," says Dan Kelly, the president of the Canadian Federation of Independent Business. "There has been a resurgence of that among our members that are now saying, 'Well, wait a minute, if the US market is uncertain, then I'll send my goods to Ontario rather than to New York.'"
The federal government says knocking down interprovincial trade restrictions could boost Canada's economy by $200 billion annually. Karaguesian believes that may be an overstatement, but that and the domestic focus are emblematic of a bigger shift. "The people that are running the United States are saying we don't really have any allies right now — we have adversaries, and we have countries we can tell what to do," making the emphasis on a more unified Canadian economy all the more important, he says.
Also on the shorter-term front, many Canadian businesses that hadn't yet bothered to get compliant with the US-Mexico-Canada Agreement because previous tariff levels were so negligible are getting their ducks in a row. Holmes, from the Chamber of Commerce, says that pre-Trump, only about half of the products crossing the border were USMCA compliant, because companies hadn't bothered to do the paperwork, but over the past four months, that's gotten to about two-thirds. He estimates that 90% of Canadian products should be compliant overall but notes that "it's just the work of getting it done."
Canadian companies aren't rushing to move their operations to the US — which seems to be, in large part, Trump's goal in all of this — but they are adapting.
"They're diversifying their sales, and they're diversifying their suppliers," says Patrick Gill, the vice president of the Business Data Lab at the Canadian Chamber of Commerce. "And so they're looking to other international markets where Canada has established free trade agreements."
The United States' attitudes have sent Canada seeking improved trade agreements and relations elsewhere, including Europe, Asia, and the Global South. In an attempt to wean itself off the US, Canada is looking to expand where it sources from and where it sells. But just how far to go is a difficult calculation.
"Some people say that Canada should take the easy win, stay linked to the US, and just ride it out. And there's other people who say that the United States is not a reliable trading partner anymore, and that Canada should strengthen its relationships with other countries. But developing those other relationships is not easy," says Morrow, from the University of Toronto.
Canada may be at its breaking point. Canadian political leaders and nationals feel like the US will never be satisfied, no matter how much ground they give. They find the 51st state jokes really offensive. And as much as the US-Canada relationship is extra strained right now, Canadians have long been skeptical of their larger neighbors. The US-Canada free trade agreement that predated NAFTA in the late 1980s was unpopular in Canada. Post-9/11, Canada resisted pressure from the US to join the Iraq invasion and chafed at President George W. Bush's "you're with us or against us" mentality. Some Canadian policymakers felt slighted by the Obama administration's attempts at pushing "Buy American" provisions and by the US-focused investments in the Biden administration's Inflation Reduction Act. The US and Canada have long grumbled over dairy and lumber.
"Canada has a strong skepticism of the US even during the best of times," Morrow says, citing a quote from former Canadian Prime Minister Pierre Trudeau (Justin's father), who said living next to the US was like "sleeping with an elephant — no matter how friendly or even-tempered is the beast, if one can call it that, one is affected by every twitch and grunt."
"The United States, for its entire history, has been a protectionist country except the time from the attack on Pearl Harbor in 1941 to the 9/11 attacks," Karaguesian says. "The United States was the biggest defender of free trade at the turn of the century because they were winning at that game."
Trump says the US has "all the cards" in trade relations with Canada. The US certainly has more cards, but Canada isn't playing with an empty hand. The country has felt emboldened to strengthen trade relations with other partners, to revive its own manufacturing base, and to separate itself economically, culturally, and otherwise from the US. Kelly, from CFIB, compares Canada's retaliatory tariffs to economic chemotherapy — "you take the poison in order to try to fight the larger battle" — and adds that it says something that the country is so willing to dig in. "There is fairly significant resolve among Canadian businesses to press back," he says.
To be sure, Trump's trade war is doing real damage to Canada — and, it should be said, to the US. Continuing the tit-for-tat won't mean mutually assured destruction for the neighboring countries, but it is one that will harm both, even if to different degrees. Canada's 40 million population can't replace the US's 340 million in terms of a consumer market. It will continue to depend on the US and, increasingly, others for commerce and trade. And the idea of a complete decoupling is quite unfathomable, unless Americans want to spend a ton more on energy and the entire North American auto sector is overhauled.
At the moment, Canadians are fired up and holding their own. They don't appear to be poised to back down anytime soon — or to forget what's happening now.
"Our elites need to wake up to the full nightmare of what Donald Trump's administration means in terms of trade," Karaguesian says. Much of the Canadian population already has — and years down the line, it could very well be to their country's benefit.
Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.
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