1. Where do US tariff rates on Canada stand?
We estimate the current U.S. tariff rate on Canada stands at 7% with the recent escalation of trade tensions, including the application of the section 338 tariffs. Last week, before this latest escalation, the effective tariff rate was about 5%.
The latest known threat from the US is a broad-based tariff on the auto sector of 50% on January 1, which we estimate would raise Canada’s effective tariff rate to around 8.5%.
Canada’s effective tariff rate remains amongst the best of the U.S. major trading partners, sitting at about par with Mexico and the U.K., but below other U.S. major trading partners such as the E.U. (8%) and Japan (13%), based on estimates from the Yale Budget Lab.
2. Which provinces and industries are most affected?
Quebec, B.C. and Ontario remain the most impacted by tariffs, and the latest section 338 measures also impact those provinces most (Chart). However, the section 338 tariffs do broaden the economic pain across the country, with material increases in Nova Scotia and Manitoba. Alberta and Saskatchewan remain largely insulated.
By industry, the manufacturing sector faces the overwhelming burden of the tariffs, although there has been a modest increase on agricultural products. Drilling deeper by sub-industries within manufacturing, the hardest hit are those related to steel and aluminum, but the latest section 338 tariffs substantially broaden the impact, particularly on textiles and apparel related industries. Electrical equipment and computers also have seen material increases. In terms of economic impact, however, transportation equipment (autos) and steel and aluminum related industries carry the greatest weight.
3. What does Canada’s retaliation look like?
Canada’s proposed retaliatory measures scheduled for September 8th target just under $30 billion worth of imports from the U.S. and raise Canada’s effective tariff rate on the U.S. from just under 3% to about 6%. By province, the retaliation is heavily weighted towards U.S. exports to Ontario, followed by Manitoba, B.C. and Saskatchewan, should these go into effect.
By industry, about half of the latest retaliatory measures relate to steel and aluminum products and generally, the retaliatory measures target intermediate goods used in production rather than final goods.
4. What’s the impact on our economy and inflation from all of this?
Canada’s economic recovery will be dented but not derailed from the latest U.S. tariffs. We expect GDP to be hit by 0.3% to 0.5% over the course of next year if the increase to a 7% tariff rate is permanent. Most of this will hit GDP growth next year. We continue to expect growth to come slightly below 1% in 2026 (including after today’s strong release, in line with our expectations) and may revise 2027 growth down from around 2% to 1.5% to 1.7% assuming these tariffs are permanent and there is no further escalation.
In terms of jobs, we estimate that the aggregate labour market response to tariffs has been modest, and we expect that to continue with the latest round, despite the broadening out of tariffs. The path of employment will be lower by 5K to 15K as a result of the section 338 tariffs.
Our estimates are based on the Canadian experience in 2025 as well as empirical work from the policy and academic literature. We don’t rely on output or jobs multipliers from Statistics Canada as others have, given they are dated and typically overstate both the direct and indirect effects.
Across a range of methods, we arrived at the following rule-of-thumb: for every percentage point increase in the effective tariff rate on Canada and the associated uncertainty effect, Canadian GDP is lower by about 0.15% to 0.2% after about one year.
The retaliatory measures Canada has adopted are relatively well designed to limit economic damage at home and inflationary pressures. About 70% of the measures target intermediate goods and a significant portion are tied to steel and aluminum products. While disruptive in the near-term, there is a high likelihood of substitution away from U.S. imports to other jurisdictions and a redirection of domestic capacity. Firms can also apply for remissions to limit economic damage. Our estimate is these retaliatory tariffs would be a drag on GDP of about 0.1% to 0.2%.
The inflationary impacts of our tariffs would also be small because Canada’s latest counter tariffs target mostly inputs (80%) as opposed to final consumer goods (20%). We expect inflation will be higher by 0.2% to 0.3% in a year from these tariffs.
Overall, while the impacts from this latest round of trade tensions are not necessarily eye-popping and the Canadian economy can more than muddle through, the reality is the costs are adding up, and the economic risks are growing. We estimate that all the U.S. tariffs to date and Canadian retaliation could be a drag of 1.0% to 1.5% or an output loss of 30 billion to 50 billion in inflation adjusted terms, and the hit to jobs could be 25K to 40K by the end of 2027.
5. What should we expect going forward?
If Canada goes ahead with these retaliatory tariffs in a few weeks, we expect a high likelihood of further escalation from the U.S. and downside risks to the economy and inflation in that scenario. The uncertainty effects are likely already hitting some businesses, and the broader manufacturing sector in this country remains firmly in the crosshairs.
The federal government has the fiscal room to cushion some of the impacts. The Bank of Canada too could ease rates if there is a significant escalation, but the bar for support from the Bank is very high given energy prices and headline inflation remains above the Bank’s target.
Canada and the U.S. appeared very close to a deal, and the Prime Minister made it clear there were some important non-economic issues that broke off the talks. However, it seems that there has been some meeting of the minds on at least some of those issues based on the latest statements from Canada and a slightly softer tone from U.S. officials. But the economy continues to stand in the balance. Canada’s economic relationship with the U.S. is broad, spanning manufacturing, natural resources, commercial and other services and finance.
The list of “irritants” on both sides had narrowed it seemed, and reasonable economic concessions appear to have been made on all sides. An escalation cycle can make that list longer, and any final deal less favourable than what was being envisaged on both sides. It’s time to get back to the table and work things out, not dig in. The longer this drags on, the potentially larger the impact and the conversation around the economy will move from how we can thrive back to how we can survive.
Contributed by Ali Jaffery, Partner and Chief Economist, and Peter Shannon, Senior Economist, KPMG in Canada.
