Oxford Economics: Canada’s Economic Output May Drop 0.3% by 2027 as Retaliatory Tariffs Against U.S. Could Backfire

Canada’s retaliatory measures will impose tariffs ranging from 15% to 50% on US imports worth about 27.5 billion Canadian dollars (19.8 billion USD) annually, covering hundreds of goods including machinery, paper products, furniture, plastics, steel, and aluminum.

Canadian Prime Minister Carney previously announced these measures in response to US President Trump's decision on August 22 to impose a 50% tariff on approximately 20 billion USD worth of Canadian goods. The Canadian government hopes that by increasing the cost of US imports, it can create a more favorable competitive environment for domestic producers and thus help Canadian companies expand their share in the domestic market.

However, Oxford Economics believes that such protection comes at a significant economic cost. Economists Tony Stillo and Michael Davenport stated: “Canada’s new retaliatory tariffs will benefit certain industries but harm most others, weakening nationwide economic growth by increasing costs for producers and consumers.”

The study forecasts that these countermeasures will raise Canada’s actual effective tariff rate on US goods by 2.7 percentage points to 5.1%. US steel products will be the hardest hit category. Many related products already face 25% retaliatory tariffs from Canada, and this rate will double to 50% under the new measures.

By comparison, Oxford Economics estimates that the current US actual effective tariff rate on Canadian goods is about 6.9%.

Regionally, Canadian provinces will be unevenly affected by the escalating trade war. Oxford Economics suggests that Ontario and Quebec will face the greatest impact, mainly because these provinces have a high concentration of manufacturers affected by the new tariffs.

Canada’s Atlantic provinces and British Columbia are also likely to see significant pressure. However, unlike Ontario and Quebec, which are mainly hit on the manufacturing side, these regions will be more affected indirectly via consumer impacts.

As tariffs push up goods prices and actual purchasing power declines, the primarily service-based economies in these areas will be further affected. In contrast, provinces with larger energy sectors such as Alberta, Saskatchewan, and Newfoundland and Labrador are expected to see relatively smaller impacts.

Oxford Economics predicts that, overall, the combination of US-levied tariffs on Canada, Canada’s retaliatory measures, and the federal government’s fiscal aid programs may result in Canada’s 2027 economic output being about 0.3% lower than the baseline forecast.

This means that, even if some Canadian manufacturers can expand their domestic market share as a result of higher import prices, the overall negative economic impact may still outweigh the protective benefits gained by these industries.

An important reason for this is that many Canadian companies themselves rely on US imports of machinery, steel, aluminum, plastics, and other production materials. Therefore, higher import tariffs not only make it more expensive for US goods to enter the Canadian market but could also directly increase production costs for Canadian firms, ultimately passing on further costs to consumers.

To mitigate the shocks to businesses and the labor market caused by the trade war, the Carney government has also introduced a federal aid package worth 7.5 billion Canadian dollars to support companies and workers affected by the tariffs.

However, Oxford Economics believes that fiscal stimulus can only temporarily alleviate some of the pressure and cannot fully offset the overall economic damage caused by higher tariffs on both sides. Stillo and Davenport state that federal financial assistance will cushion the negative economic effects of the trade war in the short term but will not be enough to offset the broader drag caused by the new round of US-Canada bilateral tariffs.

In other words, the Canadian government is effectively using fiscal spending to ease the trade war’s impact on certain industries and employment, but at the same time, tariffs themselves are still raising production and consumption costs throughout the wider economy.

Beyond slower economic growth, Canada may also face new inflationary pressures. According to Oxford Economics, the retaliatory tariffs will push up prices for imported goods and production materials, driving up both consumer and producer prices. The research estimates that by 2027, the counter-tariffs could cause consumer prices in Canada to be 0.5 percentage points higher than the baseline projection, and producer prices 0.2 percentage points higher.

However, the US tariffs on Canadian goods may themselves dampen Canadian export demand and economic activity, creating some deflationary effect that will partially offset the price increases caused by Canada’s countermeasures.