One Year of the Canada-US Trade War — What It Actually Did to the Canadian Economy, Who Got Hurt, and What Comes Next

On February 1, 2025, Donald Trump announced sweeping tariffs on Canadian goods: 25 percent on most imports, 10 percent on energy. Canada responded within days with retaliatory tariffs on $30 billion worth of US goods, which escalated to $155 billion within three weeks. The trade war that Canadian economists and policymakers had been discussing as a risk scenario had become the actual situation.

Sixteen months later, the full picture of what that trade war has done to Canada — who absorbed the impact, which sectors have been reshaped, what the Supreme Court ruling in February 2026 changed, and what the CUSMA review now underway means for the next chapter — is becoming clearer. It is a more complicated picture than either the worst-case projections of early 2025 or the optimistic government communication of 2026 suggests.

What the Data Shows — and What It Hides

The headline numbers are better than many feared. Canada posted its first per-capita GDP increase in three years in 2025. The unemployment rate moved broadly sideways. Consumer spending held up. Net foreign direct investment was positive for the first time in more than a decade, according to RBC Economics analysis published in April 2026.

These are real improvements, and they should not be dismissed. But the aggregate numbers obscure a distribution of impact that has been deeply uneven by sector and by geography.

Two million Canadian jobs depend on goods exports to the United States. The sectors most exposed to US tariffs — steel, aluminum, motor vehicles and parts, softwood lumber, manufactured goods — are concentrated in specific regions. Ontario and Quebec bear the highest effective tariff burden on their exports to the US: both exceed 6 percent. By contrast, provinces with smaller exposed industrial bases — Newfoundland and Labrador, New Brunswick, Alberta, Saskatchewan, Prince Edward Island — have effective rates below 1 percent.

The consequence is that the trade war's economic impact has not been national. It has been a hammer on Ontario and Quebec specifically. RBC projects that GDP growth in both provinces will be at the bottom of all provincial rankings in 2026. That is not a statistical footnote. It means that the economies of the two largest provinces in Canada — accounting for more than 60 percent of national GDP — are growing slower than the national average because of US trade policy, and they are likely to remain slower until the tariff picture clarifies.

The Auto Sector Is the Most Important and Most Complicated Story

The tariffs on motor vehicles and parts represent the most structurally significant trade action in the conflict. The integrated North American auto supply chain — built over decades under NAFTA and USMCA — assumes that components cross the Canada-US border multiple times before a finished vehicle emerges. A tariff on that supply chain is not simply a tax on Canadian cars entering the US. It is a disruption of a manufacturing logic that was optimised for zero friction.

The impact has been visible in plant production schedules, in overtime decisions, in the kind of investment-deferral that does not show up immediately in unemployment numbers but shows up in capital expenditure decisions over the following three to five years. Canadian auto manufacturers have been navigating this disruption with a combination of lobbying pressure on Ottawa, requests for temporary exemptions that have been partially granted and partially refused, and production scheduling adjustments that amount to managed decline in some facilities.

The ongoing CUSMA joint review — which was always scheduled for 2026 under the terms of the original agreement — is now the most important trade negotiation in Canadian history for the auto sector. The review is technically a standard process for evaluating whether the agreement continues to meet its goals. In practice, given the context of the past sixteen months, it is a renegotiation. What Canada can secure in the auto chapter — whether the integrated supply chain model survives, whether tariffs on Canadian vehicles are removed or retained as leverage — will determine the long-term trajectory of a sector that employs hundreds of thousands of Ontarians directly and millions more indirectly.

The Supreme Court Ruling and What Changed After It

The trade war had a significant development in February 2026 that received less attention in Canada than its consequences warranted. The US Supreme Court ruled in Learning Resources, Inc. v. Trump that the president had exceeded his authority in imposing broad tariffs under the International Emergency Economic Powers Act — the legal basis for many of the most sweeping tariff actions.

Trump responded by invoking Section 122 of the 1974 Trade Act, a provision that allows the president to impose temporary tariffs of up to 10 percent for 150 days to address trade imbalances — a power that has existed in law since the Ford administration but had never previously been used for this purpose. He announced intentions to raise the rate to 15 percent.

The Section 122 mechanism, while legally distinct from IEEPA, produces a similar economic result from the Canadian perspective: tariffs remain in place, the uncertainty continues, and the 150-day time limit creates a countdown that is either a negotiating deadline or a cliff, depending on what happens between now and the expiry.

For Canadian businesses that had been hoping the Supreme Court ruling would produce tariff removal, the Section 122 invocation was a reset rather than a resolution. It changed the legal mechanism without changing the economic reality. The tariffs that the ruling invalidated were essentially replaced within days.

How Canadians Changed Their Behaviour

One of the underappreciated effects of the trade conflict has been the change in Canadian consumer and business behaviour toward the United States.

Canadian travel to the United States dropped 40 percent in February 2025 compared to the same month a year earlier. A March 2025 Abacus Data poll found 62 percent of Canadians planning to avoid the US for a year. The shift has been significant enough that American tourism industry groups were warning about annual losses of US$4 billion in Canadian tourist spending. American retailers in border states reported meaningful declines in Canadian consumer traffic that traditionally supplemented local economies.

Simultaneously, Canadian merchandise exports to non-US destinations ramped up significantly in the second half of 2025. The value of trade re-routing is difficult to calculate precisely, but it represents a structural change in Canadian export strategy that would not have been pursued voluntarily. The crisis accelerated a diversification that was being discussed for years. The question is whether the new trade relationships secured under urgency are durable partnerships or expedient alternatives that will lose ground once the US situation stabilises.

The Carney Government's Management of the Crisis

The Angus Reid survey from April 2026 found that 56 percent of Canadians said the Carney government had met or exceeded their expectations on the US relationship — a positive rating that reflects genuine credibility Carney built during the campaign and in his first months in office.

That credibility is real but also somewhat disconnected from the economic impact. Carney's management of the tone and the optics of the Canada-US relationship has been widely praised — his Davos speech in early 2026 was well-received, his refusal to match Trump's rhetoric with equivalent escalation maintained the diplomatic channels that trade negotiations require. He secured buy-in from premiers across party lines for the government's trade response in a way that his predecessor never achieved on this file.

What the 56 percent approval cannot obscure is that the tariffs are still there. The CUSMA review is still ongoing. The US Supreme Court ruling changed the legal mechanism but not the economic reality. The 2 million Canadian jobs dependent on US goods exports are still navigating a tariff environment that did not exist sixteen months ago, and the diversification of Canadian exports — while real — has not come close to replacing the volume and the pricing advantage of the integrated North American market.

What the Next Chapter Looks Like

The most important variable for the Canadian economy for the rest of 2026 is the CUSMA review, and specifically what Canada can negotiate in the auto and energy chapters.

An outcome that restores zero-tariff access for Canadian vehicles and removes the steel and aluminum tariffs would represent an economic recovery catalyst. Both Ontario and Quebec could expect a return to nearer-average growth rates within two to three quarters of tariff removal. Business investment, which has been suppressed by uncertainty, would recover. The employment picture in manufacturing would stabilise.

An outcome that locks in permanent tariffs on key Canadian exports at rates above 5 percent would represent a structural diminishment of the Canadian economy that no policy tool could easily offset. It would accelerate the regional divergence already visible between heavily exposed Ontario and Quebec and less exposed western provinces. It would make the housing crisis harder to solve, not easier, because the fiscal capacity of the most affected provinces would be constrained.

Carney's government knows this. The housing, cost-of-living, and trade files are not separate problems. They are expressions of the same underlying condition: a Canadian economy whose growth model for the past thirty years was built on access to the US market, and which is now navigating what happens when that access is uncertain.

The trade war did not break Canada. The data shows that clearly. What it did was reveal how much of Canadian prosperity was built on assumptions about the US relationship that the current American administration has demonstrated it does not share. Rebuilding on different assumptions — more diversified, more domestically oriented, less dependent on the frictionless border — is the work of a decade, not a year.

Sixteen months in, the work has started. The outcome is not yet determined.

Frequently Asked Questions

What tariffs does the US currently have on Canadian goods? Following the Supreme Court's February 2026 ruling against broad IEEPA tariffs, the US invoked Section 122 of the 1974 Trade Act to impose 10 percent temporary tariffs, with stated intent to raise to 15 percent. Specific tariffs on steel, aluminum, and motor vehicles remain in place under separate authority.

How has the trade war affected Canadian jobs? Employment has held up better than feared, but manufacturing jobs in exposed sectors — particularly in Ontario and Quebec's auto, steel, and aluminum industries — have experienced production cutbacks and investment deferrals. The Bank of Canada estimated in 2025 that approximately 2 million Canadian jobs depend on goods exports to the United States.

What is the CUSMA review? CUSMA (the Canada-US-Mexico Agreement, successor to NAFTA) includes a mandatory review process scheduled for 2026. In the context of the trade conflict, this review has become a de facto renegotiation. Its outcome will determine the tariff status of key Canadian exports and the future of the integrated North American auto supply chain.

Has Canada replaced its US exports with other partners? Partially. Canadian exports to non-US destinations increased significantly in the second half of 2025, accelerating a trade diversification that had been planned but not urgently pursued. These new relationships do not yet match the volume or the margin advantages of the US market, but they represent a structural shift in Canadian export strategy.