Tariff will hurt, but escalation risks a recession, economists warn

U.S. tariffs that went into effect on Saturday are likely to slow Canada’s economic growth, but it’s the risk of escalation on both sides of the trade war that poses a bigger threat to country’s outlook, economists said Monday.

Minutes before Friday’s midnight deadline for a deal to avert the new 50 per cent U.S. levies on approximately $29-billion-worth of Canadian goods, Prime Minister Mark Carney said Canada was withdrawing from talks with it’s largest trading partner due to unacceptable “last-minute changes” from U.S. officials.

Carney pledged to match the new Section 338 levies dollar-for-dollar, with the retaliatory tariffs coming into effect the day after Labour Day.

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U.S. President Donald Trump responded in turn on Monday by threatening to impose 50 per cent tariffs on Canadian autos and auto parts , effective in January.

Most economists projected the original U.S. tariffs could shave up 0.2 to 0.6 percentage points off Canada’s gross domestic product growth next year, but the tit-for-tat responses, deteriorating rhetoric between the two sides and potential for even greater escalation have some warning of wider consequences.

“While unlikely, escalating trade tensions means the risk of the ( Canada-U.S.-Mexico Agreement ) unravelling has increased, which would plunge Canada into recession and leave it on a permanently lower growth path,” Tony Stillo and Michael Davenport of Oxford Economics in a note on Monday afternoon.

The pair said Carney’s retaliatory tariffs would likely dampen economic growth on top of the drag from the Section 338 levies and modestly increase consumer prices, but wouldn’t cause a recession. They forecast the combination will reduce Canada’s GDP by 0.3 percentage points while lifting consumer prices by around 0.3 percentage points next year.

An analysis by RBC Economics published on Saturday also warned the unpredictability of the trade war could affect business investment and sentiment in Canada.