Tariffs are hitting the economies of Canada and the United States, economists say. (Credit: GEOFF ROBINS/AFP via Getty Images)
We’re about six months into Donald Trump’s tariff war with no endgame in sight.
U.S. Treasury Secretary Scott Bessent told Nikkei Asia earlier this week that the United States expects to largely complete trade negotiations by the end of October.
In the meantime, global trade is slowing, businesses remain locked in uncertainty and the economic damages are mounting in both the U.S. and Canada, say economists.
With U.S. tariffs running at between 15 and 25 per cent in most economies, Capital Economics expects global trade to slow significantly over the next two years.
They see real world goods trade slowing from 2.4 per cent in 2024 to about 2 per cent this year and 1 per cent in 2026.
That’s assuming a 15 per cent tariff, but with current policies putting the tariff rate at about 17 per cent the hit to global trade could be even greater, they said. Sectoral tariffs on such things as pharmaceutical goods would add more pressure.
Closer to home, casualties of the trade war are showing up on both sides of the U.S.-Canada border, say economists with BMO Capital Markets.
In the United States, the strain on the economy that was first seen in “soft data” like consumer sentiment, is now showing up in the hard data, said BMO senior economist Sal Guatieri.
The weaker-than-expected jobs numbers that led Trump to fire the commissioner of the Bureau of Labor Statistics this month is just one example.
Overall the pace of the U.S. economy is slowing and BMO expects that under an effective tariff rate of about 18 per cent, gross domestic product will lose a full percentage point of growth this year.
These duties will bring in almost $400 billion in annual revenue for the government, but will increasingly be borne by consumers. Businesses have so far been reluctant to pass on the added costs but they can’t absorb big losses forever, said Guatieri.
BMO expects U.S. GDP growth to come in at about half of last year’s rate at 1.5 per cent.
In Canada, the tariff regime has been made more manageable thanks to exemptions under the Canada-United-States-Mexico Agreement, which is why the pressure is on to maintain this deal when it comes up for review.
“If the U.S. were to walk away from the deal after providing six months’ notice, Canada’s economy could face a deep downturn,” he said.
As it is, deferred business investment and a drop in exports of steel, aluminum and autos, which face their own stiff tariffs, will likely cause the economy to contract in the second quarter. BMO does not think we are headed for a technical recession, but growth will slow to 1.3 per cent this year and 1.4 per cent next.
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