Executive Order: On February 1, 2025, the U.S. President imposed a 25% tariff on all non-energy imports from Canada and a 10% tariff on energy imports, effective February 4. Similar tariffs were also placed on imports from Mexico and China.Justification: The President invoked the International Emergency Economic Powers Act (IEEPA), citing a national emergency at the southern border and a public health crisis related to drug deaths, specifically mentioning Canada's failure to intercept drug trafficking organizations as a threat to U.S. national security.Retaliation: Canada announced 25% retaliatory tariffs on C$155 billion worth of imports from the U.S., with $30 billion effective February 4 and the remaining $125 billion after 21 days.Economic Impact on Canada: The tariffs are expected to significantly impact Canada's economy, potentially leading to a modest recession. It is estimated that real GDP growth will be reduced by about 2 percentage points in 2025, resulting in roughly zero growth. This is due to reduced exports, disrupted supply chains, and decreased business investment.Inflation and Unemployment: CPI inflation is expected to rise less than one percentage point this year, while the unemployment rate is expected to increase to around 8%.Sectoral Impacts: Many Canadian industries that heavily rely on U.S. exports will be significantly impacted, including motor vehicles, auto parts, clothing, wood products, and others. The oil industry is expected to be less affected due to the 10% tariff and market adjustments.Provincial Impacts: Ontario and Central Canada are expected to be hit the hardest, with some concentrated industries in Atlantic Canada and British Columbia also affected. The oil-producing provinces are expected to experience a lesser immediate impact.Bank of Canada Response: The Bank of Canada is expected to continue cutting interest rates, potentially reaching 1.50% by October.Canadian Dollar: The Canadian dollar is expected to weaken, potentially averaging around C$1.49 by autumn, with a possible run at the C$1.50 level.Economic Impact on the U.S.: The U.S. will also experience economic consequences, including supply chain disruptions, product shortages, price spikes, and increased financial market volatility. The U.S. GDP growth forecast for 2025 has been marked down by 0.3 percentage points to 2.1%.Uncertainty: There is uncertainty about whether the U.S. will retaliate further, if exemptions will be granted, if the executive order will survive legal challenges, and how long the tariffs will last. There is also a potential for long-term damage to Canada's economy if businesses move production to the U.S..

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