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Economic Viewpoint

North American Trade Conflict

A First Assessment of the Economic and Financial Consequences

February 3, 2025
Jimmy Jean
Vice-President, Chief Economist and Strategist

The implementation of broad-based tariffs by the Trump administration is a significant escalation in trade tensions, and economic consequences will likely unfold rapidly. Indeed, the swift application of tariffs implies that businesses have much less time to adjust than previously assumed. This means that supply chain disruptions will be felt rapidly, with knock-on effects on price pressures and economic growth. This is on top of the direct and indirect impact of the tariffs themselves on consumer prices, and therefore consumer purchasing power.

 

For Canada, while the specific sectoral and provincial impacts differ from our December scenario analysis, the overall magnitude of these measures—assuming they are maintained over a lengthy period—points towards recessionary conditions. The distribution of these effects will be notably uneven across regions and industries, with some sectors such as auto manufacturing, steel and aluminum and the aerospace sector likely facing the most acute challenges, while some others may prove more resilient.

 

Looking ahead, several developments will warrant close monitoring. The US administration has signaled potential tariff actions against European trading partners, who have already indicated swift retaliation. Representing 65% of US exports, the combined responses from Canada, Mexico, China and the EU should apply significant economic and political pressure in the US, although much will depend on their sequence and coordination.

 

It is difficult to predict the end of this protectionist escalation. If, as President Trump’s executive order dictates, the issue is about fentanyl, demonstrated improvement could allow Donald Trump, on the advice of the Secretary of Homeland Security, to reverse tariff hikes. Congress can also end the national emergency declaration via a joint resolution of Representatives and Senators. However, President Trump’s grievances likely go beyond this. The wish for a sustained protectionist trade policy, or the desire to increase government revenues, could keep the tariffs in place, although it would likely turn into a major issue in next year’s midterm elections.

 

Domestically in Canada, the forthcoming announcements of government support packages—where provinces are likely to take the lead in the near term—will also be an important determinant of sector outcomes. Regardless, the Bank of Canada is expected to answer with deeper rate cuts as the shock requires not a merely neutral monetary policy but an accommodative one.

 

Our team is working to incorporate the fine details of these new developments—as well as potentially forthcoming ones—into comprehensive forecast revisions, which we will publish next week. We encourage our members and clients to maintain close contact with their Desjardins representative as this situation develops.

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.