Canada – Next door to the elephant

Tariffs first concern

As Canada’s largest export destination, US trade policy will form a major part of the election’s potential impact – and this will be more pertinent if Donald Trump is re-elected. Canada exports around 75% of its goods and services to the US, worth 25% of GDP. Trump has not discriminated in campaign speeches between current trade partners in threatening a blanket 10% tariff. Such an increase would have a material impact on Canada’s exports, though this would affect all trade partners, with US industry struggling to replace all the more expensive imports quickly. The Business Development Bank of Canada estimates a 0.3ppt impact on Canada’s GDP, but this seems low to us. We would also expect a weakening in the Canadian dollar to increase the Bank of Canada’s (BoC) inflation concerns.

In fact, we expect Canada, as part of the United States-Mexico- Canada Agreement (USMCA) trade deal (CUSMA in Canada), to escape a 10% ‘blanket’ tariff. This would make Canadian exports relatively cheaper to the US and should boost demand for Canadian products as much as for domestic US producers, lifting the 2025 outlook. Yet the USMCA deal itself is up for renegotiation in July 2026. Much as Canada was forced into concessions in initial negotiations in 2017, including on data storage, intellectual property and dairy market access, we expect similar concessions this time. That said, Canada is unlikely to be high in Trump’s trade concerns. Canada recently invoked 100% tariffs on Chinese electric vehicles (EVs) – a clear suggestion of where Canada’s loyalties lie. And even within USMCA, renegotiation is likely to be more difficult with Mexico – albeit that changes would also affect Canada’s trade with Mexico, accounting for 8% of total Canadian trade.

In his first term, Trump used trade policy to extract other concessions, something we expect to be repeated. Canada may face renewed pressure on defence spending. It has not met its 2% of GDP North Atlantic Treaty Organization (NATO) pledge since 1990, being closer to 1% for most of the last 30 years. The latest pledge to increase spending would only reach 1.76% by 2029-30. In May, 23 bipartisan US senators wrote to Prime Minister Justin Trudeau about this shortfall; Trump could be more forceful. Yet most of the impacts on Canada are likely to be felt indirectly. While we have argued that Trump will not renege on the entirety of US President Joe Biden’s Inflation Reduction Act, US EV production faces greater risks. This could impact Canada which has invested in EV battery and supply chains in anticipation of increased US production. Relatedly, US oil and gas deregulation under Trump would likely boost US oil production. This may depress margins on Canada’s own oil production, albeit that this disinflationary boost may ease other pressures for more restrictive monetary policy.

Both US candidates are likely to tighten migration but Trump’s suggested deportations may also impact Canada. This might result in some of the US’s 11mn undocumented migrants fleeing north. Canada has recently been relatively welcoming to migration but such a wave may be treated differently. First, Canada is paring back its temporary migrant workers amid some signs of a net inflationary impact. Second, Canada’s migration has to date been controlled – with few unchecked crossings – and so migration has been targeted and traditionally high-skilled. A surge from the US could change this. Also, depending on US policy, some argue that Canada’s safe third-party country agreement with the US could be challenged legally, which could grant some migrants legal refugee status. Finally, US policy may also encourage increased third-party migration, for example increasing student applications.

A Trump presidency may also play a role in Canada’s domestic politics. Trudeau faces re-election in October 2025, but his Liberal Party is currently trailing the Conservative Party in the polls. Trudeau has demonised Conservative leader Pierre Poilievre as a northern Trump – which will be increasingly awkward if Trudeau faces delicate negotiations with Trump. Moreover, Trump’s populist policies could inflame similar tensions in Canada, adding to the rightward lean in Canada’s own politics, particularly if they prompt further migratory flow.

Finally, Canada is also likely to face a material indirect spillover from US economic impacts. While we believe that escaping broad tariffs would provide a boost to Canadian GDP, we do expect US growth to slow next year under a Trump presidency and more materially in 2026. And while energy disinflation may ease the net effect, if the Federal Reserve provides less policy easing that would in turn pin the BoC to relatively more restrictive policy, via Canadian dollar weakness versus the greenback. When Trudeau’s father Pierre was Prime Minister, he observed that living next to the US economy was like sleeping with an elephant: “One is affected by every twitch and grunt” – we expect such twitches to be meaningful over the coming years.