Picture this: You’re at a diplomatic meeting where President Donald Trump threatens a massive 25 per cent tariff on all your exports, and then half-jokingly suggests your country should become America’s 51st state.

That unusual scene unfolded between Trump and Prime Minister Justin Trudeau, unsettling Canada’s trade-dependent economy. Canada is deeply connected to the US market, with bilateral trade — trade exclusively between the two countries — exceeding $960.9 billion in 2022. Any attempt to impose a blanket tariff, which applies to all goods equally, could trigger a domino effect across industries and, as many experts warn, hinder economic growth for both nations.

What are tariffs, really?

Tariffs are taxes imposed on imported goods. Historically, countries have used them to protect local industries from foreign competition, raise government revenue, or gain leverage in trade negotiations. However, tariffs can backfire — goods often become more expensive for consumers, supply chains are disrupted, and countries on the receiving end frequently retaliate. In some cases, this tit-for-tat escalation can escalate into a trade war. 

Joseph Steinberg, an associate professor of macroeconomics at U of T, highlights the power imbalance in this scenario. “The tariffs will hurt Canada[’]s economy a lot more than the [US],” he wrote in an email to The Varsity. “You can already see some anticipation of [this] in the exchange rate.” The Canadian dollar typically depreciates when such threats arise. For example, the Canadian dollar took a hit in 2018 amid Trump-imposed US tariffs on Canadian steel and aluminum. 

Industry by industry: auto, agriculture, energy

Few sectors illustrate the complexity of US-Canadian trade as vividly as the auto industry. Parts and finished vehicles cross the border seamlessly every day. Major automakers like Stellantis, GM, and Ford maintain manufacturing efficiency by depending on “just-in-time” delivery models — a strategy that focuses on reducing inventory by receiving goods exactly when they are needed.

Steinberg noted that the auto sector is “the biggest example” of how interconnected supply chains amplify the damage caused by tariffs. 

Meanwhile, Jorge Merladet — a finance professor at IE University in Spain — sees the auto sector as emblematic of a broader shift in corporate strategy. “Tariffs will accelerate and twist the ongoing change,” Merladet wrote in an email to The Varsity. “Even though we might not like it, [this can] partially [achieve Trump’s] desired effect.”

Agriculture is another sector where there could be a swift impact. While the proposed tariff targets Canadian imports, it’s not uncommon for Canada to retaliate with its own countermeasures, and agriculture is often an easy target. Both American farmers exporting to Canada and Canadian farmers relying on US markets could feel the pinch if trade relations sour.

Steinberg, however, highlights an opportunity hidden in the crisis for Canada. He explained that dumping dairy supply management might enrage Québec farmers because they’d have to pay higher prices for the products, but it’d be great for Canadian consumers since they have more variety to choose from.

Energy is another key component of the US-Canada trade relationship. Canada supplies more than half of the crude oil that the US imports. A new tariff could lead to higher costs at the pump for Americans, exacerbating inflationary pressures.

Meanwhile, demand for Canadian oil might drop if refiners seek cheaper substitutes elsewhere. U of T Economics Assistant Professor Florian Dendorfer draws upon classical trade theory — which posits that countries benefit from trade by specializing in producing goods they can make most efficiently and trading them for goods they produce less efficiently.

“Expect Canadian export prices to rise,” Dendorfer wrote in an email to The Varsity. “If retailers pass tariffs onto consumers, [US] consumers will undoubtedly feel the impact. The side with fewer substitutes — in this case, US regions relying heavily on Canadian oil — ends up bearing a larger share of the tariff burden.” 

Economic and political fallout

Despite the disparities in market size, both countries probably stand to lose if hostilities escalate. Canada relies on the US for approximately 63.4 per cent of its total trade, making it particularly vulnerable. The US, however, faces potential repercussions ranging from higher consumer prices to political blowback from businesses caught in the crossfire.

“Any tariff scheme long-term incentivises inefficiency and inflation. It must be considered in itself plus its retaliatory effects” Merladet wrote. In an era of already high global political risk, such threats only compound uncertainties for multinational firms. 

Meanwhile, Steinberg adds a policy angle for Canada. “We’ve already been falling behind the U.S. in terms of economic growth, so this new threat makes boosting investment and innovation even more urgent […] maybe it would help get Trump off our backs.”

Drawing the borders — and the lessons

Trump’s offhand remark about Canada becoming the 51st state may have been tongue-in-cheek, but the underlying tariff threat is far from trivial. From the auto sector to the energy supply, this proposed 25 per cent levy could ripple through both economies, inflating consumer prices, choking key industries, and intensifying political tensions.

As Merladet wrote, “Never [before] have… consumption and investment been so U.S.-centric […] The tariffs will accelerate and twist further the ongoing change.”

Firms will adapt, but at what cost? As Dendorfer expressed, tariffs punish both sides more than they help.