As Trump’s trade war continues with no clear winner, our North America economist Marcos Carias explains how a now unpredictable Canadian election and a not-so-invincible American economy will fare in the tedious game of this or that.
With six weeks of trade war under our belts, it’s about time we checked up on the troops.
Canada: Rally-round-the flag effect revives Liberals for potential election toss-up
A lot of tariff conversation has focused on Canada, where the stakes can escalate dramatically (and de-escalate dramatically) on any given Tuesday. The Canadian economy actually finished 2024 on the upswing, with GDP performing surprisingly well in Q4 (+2.6% QoQ annualized) and with the Q3 figure also revised higher (2.2% vs 1.0% previously). Of course, this all occurred before the U.S. inauguration and administration change.
The economy can behave in unexpected ways, which is why economists like me prefer to wait to see hard data numbers (i.e. those that measure hard facts of the economy like industrial production and retail sales) before making hard calls, even when the discourse is clearly bearish (recall all those sure-fire U.S. recession predictions two years ago). The problem is, hard data numbers tend to lag somewhere between 2-3 months. Soft indicators, typically aggregators of survey responses, provide timelier and often more forward-looking information, but can be unreliable when predicting future performance. One such indicator is the S&P Global manufacturing PMI. Any reading below 50 means a majority of respondents (purchasing managers in manufacturing firms) are expecting things to get worse. In February, it lost almost 4 points, capturing the shift from expansion to contraction.
So, the Canadian economy does not seem to be falling apart just yet. The actual extent of tariffs implemented at the time of writing (steel and aluminum + non-USMCA compliant goods) is, from a macroeconomic perspective, fairly limited compared to President Trump’s blanket threats. The issue, of course, is that tariffs remain in the pipeline, and the clout of uncertainty will continue to surround them.
The reciprocal tariff investigation is expected to take aim at the historically protected diary sector, while lumber and copper have featured prominently as targets for sector-specific tariffs. Regarding 25% blanket tariffs, my working theory is that the Trump administration wants to test, bit-by-bit and month-by-month, to determine how far they can push the envelope without shooting the American economy in the foot. We can expect the status-quo to continue until signs of recession and/or financial crisis become more abundant, or until something drastically changes in the relationship with Canadian leaders.
By the way, if this outlook was not uncertain enough for you, you’ll be pleased to know that the race to succeed Justin Trudeau as Canadian Prime Minister (PM) has also descended into unpredictable chaos (thanks to, you guessed it, the trade war). Only a couple of weeks ago, a conservative victory seemed all but a formality. Since then:
- President Trump’s tariff offensive and frequent comments on Canadian annexation have offended Canadian national pride and resurrected support to the Liberal Party, who have taken a hardline response by imposing retaliatory tariffs on $42B. (USD) of imports and used some very stern language when talking about the U.S. and its leaders.
- Acting PM and new Liberal Party leader Mark Carney revoked the consumer carbon tax, a totem of unpopularity inherited from the Trudeau government and a favorite target of Conservative party leader Pierre Poilievre.
- Polls suggest that the Liberal Party is clawing back centrist voters that flocked to the right as a repudiation of Trudeau, but also harder-line progressive voters from the New Democratic Party (NDP). The NDP played a key role in Trudeau’s downfall, exiting a governance agreement with the Liberals last September and leaving them open to a no-confidence vote.
So what is my forecast? It’s simple: anything can happen.
PM Carney is expected to call early elections in the following weeks. Both Poilievre and Carney can secure a majority, but the liberals have the wind on their backs. Party loyalty is more fickle in Canada than, say, in the ultra-calcified U.S. electorate; a lot can happen in a campaign. Either of them can fall short of a majority, which brings the smaller parties into the game. If the Liberals edge ahead, a renewed agreement with the NDP is likely and can result in a stable minority government (assuming the NDP does not evaporate entirely). The NDP would never support the Conservatives, which would leave them relying on the support of the Bloc Quebecois (BQ). For the uninitiated, the BQ is a regionalist party that kind of transcends the left-right spectrum by having Quebecois independence as its overarching principle. It can easily find itself kingmaker, as it is currently projected to land around 30 parliamentary seats. However, it has a history of avoiding collaboration with national parties when it can. I can picture a scenario where whoever promises to help Quebec get closer to regional autonomy gets BQ's blessing. If you are looking for drama, cancel your streaming services and subscribe to Canada.
In any case, the rally-round-the-flag effect is not going away anytime soon. Whoever leads the country next will have an incentive to continue the defiant stance against the U.S., at least in the short-term. We’ll be in a dangerous area where things can escalate beyond what either the Americans or the Canadians would like, especially if they box each other in to showing strength. Threading the needle of this back-and-forth escalation will be challenging, but if bankruptcies and unemployment shoot up, we’d expect the electorate’s appetite for belligerence will decrease and therefore incentivize a lowering of the temperature. Ontario Premier Doug Ford walked back pledges to restrict electricity exports to the US after Trump threatened to double the rates on steel and aluminum, suggesting there’s a limit to how far Canadian leaders can escalate. Stateside, we’ve seen in the past that extreme statements do not necessarily lead to extreme action (remember North Korea?). If that changes… well, we’ll cross that bridge when and if we get there. All in all, I see enough bearishness on the horizon to merit a hefty slash to our 2025 Canada GDP growth forecast, from 1.6 to 0.8.
U.S: The American economy might be exceptional, but is it invincible? All eyes on April 2nd
It takes two to tango, of course, and I’d be remiss in not mentioning the recent rising recession fears in the U.S. team Trump has been active in messaging that if the tariff omelet takes breaking some eggs, so be it. But I remain curious how far down this route they are willing to go.
Denying the public’s very vocal tariff woes, may give the appearance they are out of touch. But pulling back their flagship project may also create negative optics for the administration. The pattern we have so far in North America is the talk is big but the action is narrow. In other words, they do most likely have a pain tolerance threshold.
With 20% blanket tariffs already in place for China and likely to follow for the EU on April 2, economic pain is expected. Taken as a whole, trade with the EU is about as big as trade with Canada or Mexico. These actions have put the U.S. economy on a path for stagnation, if not a small contraction, in Q1.
Understanding weak spots of the economy
Anticipating where tariffs might hurt the most and taking action to protect these weak spots is not easy. The graph below charts U.S. imports from China, Mexico and Canada as a % of U.S. domestic production by sector. The larger that figure, the more we can expect tariffs on these countries to hurt the U.S. economy.
While cars and steel roils have received their 15 minutes of fame, there are some notable sectors that deserve their time in the spotlight. Textile products, for example, is a sector where the U.S. has a huge dependency on clothing and apparel from China. In the medium term, textile products are relatively easy to diversify to other countries, but for 2025 that’s going to be a substantial shock to unit margins. If consumption is coming to a halt, and the price wholesalers pay for clothing is going up… where does that leave retailers? Brick-and-mortar shops in particular have already been suffering the intense competition of online sellers, and boutique shops in the online space (many of which are suppliers for the larger online players) will also be pretty exposed.
In a recent report of record high layoffs focused much attention on the impacts of the Department of Government Efficiency (DOGE) slashes, but retail layoffs also account for a substantial piece of the pie.
For now, it doesn’t appear the tariff fight has any clear winner (or that there will be any winner at all). We’ll just have to keep up with the punches, and keep walking through the fog.
Marcos Carias is a Coface economist for the North America region. He has a PhD in Economics from the University of Bordeaux in France, and provides frequent country risk monitoring and macroeconomic forecasts for the U.S., Canada and Mexico. For more economic insights, follow Marcos on LinkedIn.
Are you doing business with Canadian companies and want more predictive insights? Contact our experts now.
