Trade War: From Wait-and-See to Difficult Decisions

Since the start of the trade war, Canadian businesses have been trying to navigate an environment where the goalposts can move with little warning. From spring 2025 to early 2026, many adopted a wait-and-see approach. Why overhaul supply chains or shift to other markets if negotiations with the US administration could still produce an agreement? That approach seemed entirely rational, especially since a similar scenario had played out during Trump’s first term.

By early 2026, however, the mood appeared to be shifting. The prospects for an agreement remained uncertain, but businesses seemed to be growing more accustomed to the uncertainty. Some gradually resumed projects they had previously put on hold. The Bank of Canada’s Business Outlook Survey showed that in the first quarter of 2026, sales outlooks improved for a third consecutive quarter, while investment intentions reached their highest level since the trade turmoil began. The picture remained uneven, particularly between businesses directly exposed to tariffs and those that were not. Sentiment also deteriorated somewhat starting in the second quarter, this time because of higher energy costs associated with the war in Iran. Still, by the first half of the year, many businesses appeared to be finding their footing.

Then came August. The suspension of trade negotiations between Ottawa and Washington, followed by new US tariffs of 50% on approximately $27.6B of Canadian products on August 22, dealt another major blow to hopes for a relatively favourable resolution to the trade dispute. Unlike several earlier measures, the new tariffs did not include a carveout for products compliant with the CUSMA, catching affected exporters by surprise. Canadian counter-tariffs that took effect on September 8 then added further cost pressures for some importers. The latest tariffs affect products representing only about 5% of Canadian exports, but their significance extends beyond the goods directly targeted. If businesses increasingly view the deterioration in Canada–US trade relations as lasting rather than temporary, some may finally make decisions they had previously been willing to postpone.

Initial Signs That Businesses Are Adjusting

It’s still too early to assess the full impact of this latest chapter, but the initial signals aren’t especially encouraging. In September, the CFIB’s Business Barometer® long-term index fell 10 points to 47.9. Its short-term optimism index posted a similar decline. Pessimism was particularly pronounced among exporters, whose index stood at just 38.6. It would be premature to attribute all of this deterioration to the trade war, especially given the current high energy costs. Still, the gap between internationally active businesses and those focused on the domestic market points to the particular challenges facing exporters.

The employment data also bear watching. After shedding 42,000 jobs in August, the Canadian economy lost another 68,000 positions in September. Although the latest monthly decline was largely concentrated in utilities, manufacturing shed 13,000 jobs and has lost more than 40,000 positions since January 2025. We’ll need to keep a close eye on hours worked in the industries most exposed to US trade (graph 1). Businesses often reduce overtime or shifts before resorting to layoffs, so a sustained decline could point to further weakness ahead.

Price intentions among small and medium-sized businesses are another warning sign. According to the CFIB, planned price increases rose from 2.6% in August to 3.3% in September. Again, several factors are at play. But counter-tariffs are adding to the pressures facing some businesses, leaving them to absorb the higher costs through narrower margins or pass them on to their customers. The trade shock could therefore squeeze businesses from both sides, restricting access to some markets while raising the cost of doing business.

The Risk of Quietly Eroding Economic Potential

Beyond these initial data, a broader question is emerging: Are businesses moving from a wait-and-see approach to making more lasting adjustments? As long as a rapid normalization of trade relations remained plausible, maintaining existing capacity while waiting for conditions to improve was a reasonable strategy. But the longer trade tensions persist, the more businesses must consider the possibility that a less favourable trading environment is here to stay.

These adjustments can take very different forms. Some businesses will diversify their export markets or suppliers, or invest to refocus their operations. Others will cut production, postpone or cancel expansion projects, or consider closing facilities. In other words, moving from wait-and-see to adaptation doesn’t necessarily signal better days ahead. In some cases, adapting may mean permanently scaling back operations.

That’s why it’s important to focus on the structural effects of the trade shock rather than getting bogged down in the debate over whether Canada will enter a recession. Tariffs directly affect a relatively limited share of economic activity, while other forces, particularly strong energy-sector revenues, public spending and the resilience of several service industries, may continue to support growth. But avoiding a recession doesn’t mean the economy will emerge from the trade conflict unscathed.

In a typical cyclical recession, weaker demand causes economic activity to contract and unemployment to rise. If productive capacity remains largely intact, supportive fiscal and monetary policy can help the economy recover and move back toward its previous trajectory. The challenge is different when factories close permanently, equipment loses its economic utility or investments are abandoned. Workers and capital can be redeployed elsewhere, but that process takes time and can involve losses in efficiency. The result may be lasting damage to the economy’s productive capacity, well beyond the just over 18 months that the average recession and subsequent recovery lasts.

The economic consequences could therefore be significant even if GDP never declines. Consider an economy that would otherwise grow by about 2% a year. If its growth rate were permanently reduced to 1%, the economy could suffer a substantial loss without ever contracting. After five years, its output would be nearly 5% below where it otherwise would have been (graph 2). Unlike a cyclical slowdown, that lost ground cannot simply be recovered by cutting interest rates.

In its January projections, the Bank of Canada estimated that Canadian GDP at the end of 2026 would be approximately 1.5% lower than it had projected before the trade war in January 2025. About half of that shortfall was attributed to lower potential output rather than simply weaker demand. In other words, even before the latest tariff escalation, some of the damage was already expected to be structural.

That’s why the decisions businesses make today may ultimately matter as much as the next set of GDP figures. As we highlighted in our Economic Viewpoint External link. published yesterday, diversification and productivity-enhancing investments could help preserve, or even strengthen, some of Canada’s productive capacity. But these transformations take time, and their benefits won’t necessarily offset losses elsewhere. Conversely, every investment that is abandoned and every production facility that closes permanently can make it harder for the economy to return to its previous trajectory.

August may therefore have marked a turning point in how Canadian businesses respond to the trade war. More data will be needed to determine whether the wait-and-see approach is truly giving way to more structural decisions, as well as how governments adapt their support measures External link. for affected businesses. But one thing is clear: the ultimate economic cost of the trade war won’t be measured simply by whether Canada enters a recession. Above all, it will depend on what Canadian businesses are still capable of producing years from now.