Canada has a lot to lose

Axios

11-02-2025

The North American trade drama is unfolding against a backdrop of diverging economic performance that gives President Trump leverage in the trade war.
Why it matters: The two nations are tightly linked by the trade patterns that the White House threatens to blow up.
Canada is already on weak footing. Heightened conflict that would disentangle its economy from the U.S. would be a crushing blow.
What they're saying: "It's odd to have such a large difference in the two economies as we've seen in the last two years," Doug Porter, chief economist at BMO, tells Axios.
The U.S. economy has grown at an annual rate of 2.8% over the last couple of years, versus 1.2% for Canada's economy.
The unemployment rate in the U.S. is a low 4%; in Canada, it is 6.6%.
Between the lines: It looks like the U.S. economy nailed a soft landing after the inflation shock, but Canada's landing was bumpier.
Like much of the rest of the world, Canada's central bank aggressively raised interest rates to squeeze out inflation. But Canadians felt the squeeze, and many homeowner mortgages reset in as little as three years.
Other factors are at play: There was no productivity surge in Canada, business investment is stagnant, and the country is not benefiting from the animal spirits behind the AI boom.
The intrigue: Canadian monetary policy typically moves in lockstep with that of the U.S. But this time, it cut interest rates sooner, and at a much quicker pace relative to the U.S., to protect its economy.
Since June, the Bank of Canada has cut rates by 2 percentage points — a full point above the Fed's cumulative cuts that are now on hold.
"Throughout most of the past 20 years, Canada-U.S. interest rates have been fairly similar," Porter says. "It's really unusual to have such a large gap in rates, but these are unusual times."
What we're watching: Trump said he would put 25% tariffs on steel and aluminum imports, an announcement that could come as soon as Monday.
It's unclear whether Canada — the overwhelming source of U.S. steel imports — will be subject to these tariffs, even as others remain on hold.
If the tariffs go ahead, few nations will be impacted like Canada, which risks losing its biggest buyer if the U.S. ramps up domestic production.
That is, at least, what the stock market is betting: Shares of steel producers are soaring.
Flashback: The tariffs have shades of 2018, when Trump imposed similar levies on steel and aluminum.
Like the U.S., Canada was in the midst of a lengthy economic expansion. Exports of its aluminum fell almost 20% and steel exports dropped by 40%, according to a TD Bank report released this month. Canada's economy continued to grow, though at a slower rate, and unemployment and inflation stayed low.