The return of United States President Donald Trump to the White House has delivered a jolt to the stewards of Canada’s $2.1 trillion economy.
Already buffeted by domestic pressures such as stagnating growth and a housing crisis, Ottawa is now facing the threat of tariffs from the US, its biggest trading partner.
Trump’s promise to steer the US on a protectionist course sets up hefty challenges for whoever replaces Prime Minister Justin Trudeau, the country’s deeply unpopular outgoing leader, before national elections that could be held as early as May, economists say.
“It’s a daunting task for whoever takes over from Trudeau because from there it’s a short ramp for an early election call,” Tony Stillo, director of Canada Economics at Oxford Economics, told Al Jazeera.
“It’s very tough. The electorate looks ready for a change and Trudeau may shore up popular support for the Liberal Party with a new face, but it may not be enough.”
While tariffs barely got a mention in Trump’s inaugural speech on Monday, any hope of a reprieve was banished hours later when he announced that he could impose a 25-percent tariff on Canada and Mexico as soon as February 1.
“What happens to Canadian exports in case of a tariff war with the US – that’s a huge determinant of economic outcomes as 80 percent of our exports go to the US and that’s an awful lot of vulnerability,” Lars Olsberg, an economics professor at Dalhousie University in Halifax, Nova Scotia, told Al Jazeera.
Canada’s exports to the US alone make up about 20 percent of its gross domestic product (GDP).
A 25-percent tariff would have a “significant” effect on the Canadian economy, potentially triggering a recession, Stephen Brown, deputy chief North America economist at Capital Economics, told Al Jazeera.
Brown said, however, that Trump’s tariff threats could be posturing to gain leverage in negotiations over the United States–Mexico–Canada Agreement, which is up for review next year. Trump is a negotiator and “will look for concessions so he can say he’s got a good deal”, Brown said.
Trump has been clear that there are three areas of concern with regard to Canada: the trade deficit, border security and Canada’s relatively low defence spending in NATO.
Ottawa could deal with those in one stroke if it chose to buy more defence equipment from the US, Brown said, which enable it to meet NATO spending targets and boost security on the border.
Canadian officials also have some leverage since the country provides about 20 percent of the crude oil consumed south of the border and could theoretically shut off supplies, he said.
Last week, Canadian Foreign Minister Melanie Joly told reporters that Ottawa was ready to respond to tariffs.
“And we are ready for a second round and we are ready for a third round,” Joly said.
After Trump’s Monday night comments, Canada’s Finance Minister Dominic LeBlanc said it would be “a mistake” for the US to proceed with tariffs.
“It would be a mistake in terms of the cost of living in the United States, in terms of jobs in the United States, the security of supply chains,” LeBlanc said.
A North American trade war would deal a “body blow” to the US economy, resulting in slower growth and higher inflation, unemployment and petrol prices, Oxford Economics said in a note on Tuesday.
That said, there is also the reality of a “lame duck” prime minister who will have to deal with the US administration, Stillo said.
Domestic pressures
Trump aside, Trudeau and his Liberal Party are under pressure on the domestic front amid widespread discontent about unaffordable housing and the state of public services such as child care and healthcare.
Another drag on the government’s popularity has been the carbon tax, which has become a rallying cry of the opposition Conservative Party, led by Pierre Poilievre.
Introduced in 2019 to spur the transition to cleaner energy, the tax has risen four-fold to 80 Canadian dollars ($55.5) per tonne and is scheduled to reach 170 Canadian dollars ($118) by 2030.
To that effect, opposition leader Poilievre has pledged to “axe the tax”.
While a repeal of the tax would reduce petrol pump prices by 25 cents per litre, scrapping the carbon pricing scheme would also halt rebates provided to eligible individuals and families to offset the cost of higher fuel prices.
“While the net impact on the majority households will likely also be a wash, it will vary for individual households depending on their specific driving habits,” Stillo said.
Then there is immigration.
While immigration helped Canada’s population grow by about 1 percent on average each year over the past decade, the number of residents surged 3.2 percent between 2023 and 2024, the biggest annual rise since the 1950s.
Blamed for exacerbating pressures on Canada’s housing, healthcare and education, Trudeau in October announced a sharp cut in the migrant intake, upending many lives and business plans in the process.
“One of the tragedies of the Trudeau period is that the consensus on immigration is looking pretty shaky,” said Dalhousie University’s Osberg.
In an October poll released by the Environics Institute for Survey Research, 58 percent of Canadians said the country accepts too many immigrants, up 14 percentage points since 2023. That followed a 17 percentage point increase between 2022 and 2023.
The rise in negative sentiment toward immigration over the two-year period was the most rapid change since the Environics Institute began asking the question in 1977, the institute said.
The results also showed that the proportion of Canadians who say there is too much immigration reached its largest since 1998.
While anti-immigration political parties have made little headway, an increasing number of Canadians are for the first time expressing doubts about who is being admitted to the country and how well they are integrating into Canadian society.
For years, Canada focused its immigration policy on skilled migrants, Olsberg said, except for a brief period after the COVID pandemic when small businesses complained they couldn’t find workers.
“Now you have people working in [coffee chain] Tim Hortons and [department store] Canadian Tire on temporary worker visas. Those are permanent jobs, but now you’re stuck with the consequences,” he said.
Some of the policy changes on immigration are already starting to trickle down to the economy including the reduced number of temporary resident visas being issued. Along with looser mortgage lending rules, housing availability is easing up and rents are starting to drop.
In addition to a slowdown in immigration that has helped drive growth, the next government will also face longstanding structural problems, including low productivity and weak business investment, experts said.
“Increasing inequality and increasing insecurity creates a lot of anger and anxiety,” said Olsberg.
“Then along comes COVID, a massive danger out of nowhere, then suddenly there’s a major war in Europe. The world is changing around us. Pierre Poilievre has been very adept at focusing all that anger on Trudeau and now there’s chaos agent Donald Trump. All that anger and anxiety is the core set of issues.”
