'The worst is behind us': Canada's economy is defying some of the grim forecasts about Trump's tariffs

WASHINGTON, D.C. — When U.S. President Donald Trump first threatened tariffs on Canadian goods, the forecasts were grim.

GDP was expected to decline three per cent in seven months, job losses in the auto sector would top 100,000, inflation would tick up over 3 per cent and Canada would be mired in a recession.

Analysts expected the worst when Trump threatened to use “economic force” to transform Canada into the “51st state.” But it has not come to pass.

While the trade war has indeed caused unemployment spikes, supply chain disruptions, and a rough second quarter, in terms of growth, Canada has largely been defying the odds in some surprising areas. The question is, can it hold in 2026 and beyond?

“In terms of shock to the Canadian economy, the worst is behind us,” said Andrew DiCapua, the principal economist at the Canadian Chamber of Commerce.

For those keeping score, Canadian exports to the U.S. that are not compliant with the Canada-U.S.-Mexico Agreement (CUSMA) face 35 per cent tariffs. There’s a 10 per cent tariff on non-CUSMA-compliant potash and energy, a whopping 50 per cent tariff on all Canadian steel, aluminum, and copper exports to the U.S., and a 25 per cent tariff on (non-U.S. content in) cars and light trucks. Non-CUSMA-compliant auto parts face an additional 25 per cent tariff, and softwood lumber is being tariffed at around 35 per cent.

Shortly after Trump announced that tariffs were coming in early February, the Canadian Chamber of Commerce’s Business Data Lab (BDL) crunched the numbers to see which Canadian cities were the most vulnerable — looking at U.S. export intensity and dependence on America, a key export market.

Topping the list were Saint John, N.B., home to the country’s largest crude oil refinery, at a 131.1 per cent exposure rate, followed by Calgary, thanks to it being a major crude oil and natural gas exporter that also exports a lot of beef. Southwestern Ontario’s cities, including Windsor, Kitchener-Cambridge-Waterloo, Brantford, and Guelph, Canada’s automotive hub, came in third through sixth.

The University of Toronto’s School of Cities has also mapped potential direct exposure to U.S. tariffs, taking a more multidimensional view of the economic ecosystem — labour market characteristics, regional diversity, supply chains — to weigh national vulnerabilities. While the auto-manufacturing hubs are the worst off, as expected, the overall tariff exposure has been more uneven than many experts anticipated.

Since the projections, the hardest hit areas have proven to be concentrated in Ontario and parts of New Brunswick, reflecting their reliance on automotive manufacturing, steel, aluminum, and lumber.

“I’d say, for the most part, our emphasis on the acute difficulties in southern Ontario have been correct,” said DiCapua.

But areas like Saint John, Calgary and many other Alberta cities, which topped the BDL’s list, have been more insulated from tariffs than Southern Ontario because the energy sector has faced lower tariffs.

Karen Chapple, director of the School of Cities at the University of Toronto, said she initially feared “that this would be more of a small town story” with one-plant towns of 20,000 or so throughout Ontario bearing the brunt. But when she looked at her database, mapped out nationally, she was surprised by the level of impact on cities.

“I don’t think of Toronto as being a place where you have a lot of manufacturing,” Chapple said, “but it gets hit … not necessarily downtown, but the outskirts of the region.”

It’s similar with steel and aluminum.

“I associate steel plants with small towns, but it really hits the entire metropolitan areas of Montreal and Toronto because they’re doing so much and making so many products that involve steel or aluminum,” she added.

It’s clear that Ontario and a bit of New Brunswick face the deepest threats from tariffs, overall, but for Chapple, whose data looks at residents where they work and where they live, it’s the sheer number of communities being affected that’s truly astonishing.

“No community in Canada — well, no community of any significant size in Canada (over 20,000 people) — is able to skate free of the tariffs,” she said.

The first three quarters saw significant manufacturing job losses amid all the uncertainty — especially concentrated in the auto corridor of Ontario. But some regions and sectors have shown remarkable resilience.

“If you take the last two months, we’ve seen some rebounding in the manufacturing sector,” said DiCapuo, noting that the country is still down 12,000 manufacturing posts since January.

Manufacturing sales saw a rebound in September, rising 3.3 per cent following August’s one per cent drop, according to Trading Economics. That is Canada’s highest growth rate since Trump announced the tariffs — with sales improving for two-thirds of the subsectors.

Also, many assumed that consumer demand would plummet this year, and while retail sales have been volatile, they’ve generally gone up. They are projected to hit $649.8 billion this year for a 2.4 per cent increase over 2024, according to IBIS World.

This, combined with a surging “return to office” trend this year, means “both retail and office have done surprisingly well this year,” said William Strange, an economics professor at the University of Toronto, noting how many Canadian employers have moved away from their remote work models, embracing more in-office schedules.

Strange said the commercial real estate sector has shown unexpected resilience this year, with industrial properties leading and retail and office sectors doing surprisingly well.

“Most people looking at commercial real estate over this year have been pleasantly surprised that there hasn’t been generalized decline post-Liberation Day,” he added.

Roughly 75 per cent of Canadian exports head to the U.S., so Ottawa has been promoting trade diversification in the face of Trump’s tariffs as a way to reduce future vulnerabilities.

DiCapua pointed to progress already been made in getting Canadian products, especially oil and natural gas and some agricultural products, to other markets, particularly in Asia and Europe. “The value is still low relative to what we’ve lost to the United States, but there are some encouraging trends there,” he said.

But Canada’s heavy trade dependence on the U.S. isn’t a new problem. Back in 2005, 83.8 per cent of Canada’s exports were to the U.S., and it took a long time to trim that down to 76.4 per cent last year.

“We’ve come a long way,” said Chapple, “but my gosh, you know that it’s taken that long to get down just a little bit.” Going from three-quarters of exports going to the U.S. to around half would be a huge shift.

“How are we going to get down to a significant amount?”

While Trump’s tariffs have certainly not helped buoy the Canadian economy, they also haven’t wreaked the level of havoc many feared earlier this year. Retail has proven resilient, manufacturing is starting to rebound, and the economy has thus far avoided recession.

While uncertainty with the tariffs remains, DiCapua said that Canadian businesses can now at least plan ahead, given that the tariff rates are set, whereas many businesses hit pause on decision-making earlier in the year.

“Even though it’s a challenging time and some industries are facing acute challenges and we’re seeing employment losses in some sectors, it’s a little bit clearer now to operate in this environment than it was back in April,” he said. This is why he believes the worst moments have passed.

But have they? Trump’s White House hasn’t shown many signs of wanting to ease tensions with Canada over trade in recent weeks.

In fact, the president shut down negotiations over a television ad sponsored by Ontario Premier Doug Ford starring Ronald Reagan talking negatively about tariffs. And while many may hope that the U.S. Supreme Court will overturn Trump’s imposition of tariffs under the International Emergency Economic Powers Act (IEEPA), the brunt of tariffs hitting Canada now are levied under sections of the Trade Expansion Act. Experts say that the president will use those tools more to levy tariffs if the court rules against his broad-based ones.

Much of Canada’s resiliency for 2026 and beyond falls on the sanctity of CUSMA. Most exporting businesses have escaped tariffs this year by being CUSMA compliant and adapting to changing supply chains, and while most trade experts believe Trump will want to keep CUSMA in some form, there are no guarantees.

“Everybody is nervous that there will be no more CUSMA,” said Chapple. “How do we deal with that? The dependency is enormous.”

Her biggest concern is that Canadian goods that are coming in as CUSMA compliant will also end up being tariffed. If that happens, she said, then the U.S. may start buying from elsewhere – from Mexico or India – where prices could be lower.

But DiCapua believes Ottawa is doing all the right things to keep a dialogue about free trade going with the U.S.

“As long as we continue to talk through our differences and challenges, I think there’s a reasonable expectation that we will continue to have some form of agreement in place,” he said, emphasising the need to remind Americans of the success story of CUSMA and how interdependent the two countries are.

“We have to be optimistic because we need to be.”

National Post

• Why decades of protectionism have not helped the U.S. steel industry
• U.S. Supreme Court justices give an early sign they are skeptical of Trump’s tariffs

Our website is the place for the latest breaking news, exclusive scoops, longreads and provocative commentary. Please bookmark nationalpost.com and sign up for our newsletters here.