Why Trump’s Tariffs Didn’t Break Canada

The Canadian and American economies are woven together tightly. So when Donald Trump slapped 25 per cent tariffs on Canadian imports last year, many economists—myself included—looked into our crystal balls and saw a disaster looming. Unemployment would rise sharply, households would pull back on their spending, profit margins would thin and business investment would slow down. We’d be in a recession.

The most exposed sectors were those most dependent on U.S. demand: steel, aluminum, autos, energy and lumber. More than half of Canadian products have mostly American customer bases. At the Canadian Chamber of Commerce, where I’m principal economist, our research showed that southwestern Ontario cities—like Windsor, Oshawa, Kitchener-Cambridge-Waterloo and Hamilton—would feel the brunt.

We didn’t know if the full extent of the tariffs would be implemented, but the uncertainty alone was dangerous. In our worst-case scenario, we expected that sweeping 25 per cent tariffs and country-by-country retaliation would shrink Canada’s GDP by 2.6 per cent, leading to a moderate recession and shaving nearly $2,000 a year off income for every Canadian.

So far, however, that doomsday scenario hasn’t materialized. Forecasts show that Canada’s GDP grew 1.7 per cent in 2025, even after a 1.8 per cent contraction in the second quarter. Manufacturing orders have been climbing back from their April lows and employment has held up, though sectors not exposed to tariffs are obviously faring better. The IMF, in their recent assessment, even acknowledged our resilience, saying, “Canada’s economy has held up better than expected despite a significant external trade shock.”

This was possible because of five letters: CUSMA, or the Canada-U.S.-Mexico trade agreement, signed during Trump’s first term.

Two days after Trump announced the tariffs, the White House made a crucial tweak that protected the automotive supply chain and other integrated sectors: goods that claimed and qualified for CUSMA preference would be exempt from tariffs. (It wasn’t a voluntary concession so much as a forced adjustment, driven by industry pushback.) When selling a product in a country, importers must pay tariffs unless they can prove a product meets the rules of origin required to access a trade deal’s preferential rate. Under CUSMA, most goods that satisfy those thresholds can enter tariff-free.

In 2024, even though most Canadian exports qualified under CUSMA, only about 40 per cent of goods used the exemption. Rather than deal with CUSMA paperwork, many companies found it easier to just pay the most-favoured-nation rate—the minimum tariff rate that importers pay if they don’t claim under a trade agreement—of roughly 2.5 per cent. But after Washington announced the exemption, Canadian businesses rushed to claim CUSMA preference. By July 2025, CUSMA use reached a 20-year high. In August, about 90 per cent of trade flows were shielded by the agreement. The federal government even created a hotline to help firms with paperwork. With this protection, the average weighted tariff rate on Canada was around five per cent, one of the lowest of any nation trading with the U.S.

Some companies also scrambled to swap out U.S. suppliers and rethink their supply chains. For instance, grocery stores increasingly stocked local produce, ice cream makers sourced their fruits and nuts from Canada, and snow plow manufacturers sourced steel domestically. 

Surprisingly, household spending held up better than expected. After Trump repeatedly said that Canada should become a U.S. state, Canadians became patriotic consumers. As of the third quarter of last year, 60 per cent of Canadians intended to purchase Canadian goods over American ones, according to the Bank of Canada’s survey on consumer expectations. The Buy Canadian movement likely boosted Canada’s GDP slightly. The World Series playoff run by the Blue Jays surely helped.

Related: Buying Canadian? There’s a Website For That.

The Bank of Canada supported domestic activity. It was one of the first major central banks to cut interest rates swiftly after the inflation spike faded. It lowered its policy rate by a full percentage point last year, giving borrowers breathing room and supporting the economy through this uncertainty.

Governments also took action. Ottawa provided targeted financial support to sectors impacted by tariffs, keeping firms solvent and workers supported. Provinces used procurement policies to shut U.S. firms out of contracts; Ontario notably pulled American liquor from LCBO shelves. Interprovincial trade barriers suddenly gave way to some progress. Nova Scotia, for example, introduced mutual recognition, allowing out-of-province goods, services and people to move freely. This was a small step but a symbolic one after years of stalemate.

The completion of the Trans Mountain Expansion pipeline and a new LNG export facility in B.C. also supported trade diversification and buffered some of the lost demand from the U.S. The share of petroleum exports to non-U.S. markets reached almost 10 per cent, up from three per cent over the past decade. LNG exports went from zero to 800 million cubic feet per day and are now shipping to Asian markets. When I worked at Export Development Canada, we spoke about diversification every day, but few businesses have the risk tolerance required. It’s costly and more complicated for exporters to shift away from a (previously) sure bet and trade overseas. It’s unreasonable to expect we can displace the $500 billion in exports to the U.S. annually, but we can grow the overall pie and make steady progress. As of October, Canada’s share of exports to the U.S. dropped to 67 per cent, the lowest outside the pandemic.

Avoiding the worst of the tariffs doesn’t mean we’ve won or even survived the trade war. Communities across the country are still hurting. Southwestern Ontario is dealing with layoffs and plant closures tied to U.S. tariffs. Regions in Quebec and British Columbia are under strain, with key industrial sectors—steel, aluminum, copper, lumber—facing additional tariffs under Section 232 authority, which allows the president to tariff imports from Canada under an assumption of threatening U.S. national security. Trade-exposed sectors lost 33,000 jobs last year.

And then there’s this year’s CUSMA review. Depending on the outcome, our shield may no longer be able to save us. Even if the agreement survives, Canada will likely need to offer up concessions to preserve our preferential access to the U.S. market, particularly around limits to tariff-free exports in targeted sectors and access to the Canadian dairy market.

We should not get comfortable. The IMF may have commended our resilience, but in the same breath, they pointed out that we’re performing below our potential. The Bank of Canada estimates the economy will be about 1.5 per cent smaller than otherwise predicted. If we don’t address this GDP gap, Canadians will take a permanent pay cut equivalent to losing $1,300. This could set us back further if we don’t address Canada’s lacklustre performance on productivity, investment and internal trade, things within our control.

The true cost of the trade war won’t be tariffs. It will be failing to use tariffs as a catalyst to become a more competitive economy. Inaction will be our economic downfall.

Andrew DiCapua is principal economist at the Canadian Chamber of Commerce