Tariff trauma: Economist breaks down impact on Canada, U.S. economies

By Joshua Santos
September 04, 2025 


While the U.S. Supreme Court prepares to rule on the legitimacy of U.S. President Donald Trump’s tariffs, an expert says the damage has already been done as the trade war sets a new normal of higher but manageable tariffs that Canadian businesses and consumers need to adapt to.

Sal Guatieri, senior economist and director of BMO Capital Markets, said the Trump administration could impose duties under other trade acts if needed.

“One way or another, we’re going to get stuck with tariffs,” Guatieri told BNN Bloomberg in a Wednesday interview. “It’s just a question of what trade act is used to impose those tariffs.”

Last week, a U.S. appeals court ruled the tariffs were illegal, undercutting the U.S. president’s authority. The court allowed the tariffs to remain in place through Oct. 14 to give the Trump administration a chance to file an appeal with the U.S. Supreme Court.

Guatieri says casualties of the trade war are showing up on both sides of the U.S.-Canada border, with businesses reporting lost revenue, laying off employees and closing in some instances, though he says the outlook has improved somewhat.

In a recent BMO report, he highlights the impact of duties on the U.S. and Canada. He states economic weakness is now showing up in the hard data as private nonfarm payroll gains in the U.S. averaged just 80,000 in the five months leading up to July, the second-weakest pace (apart from the COVID-19 pandemic) since 2010.

Real gross domestic product (GDP) growth in the U.S. averaged 1.4 per cent annualized in the first two quarters, the weakest rate in three years as the 30-year mortgage rates is still above six and a half per cent. Business investment however picked up in the first half of the year.

“Business investment remains very strong. It was surprisingly very strong in the first half of this year. There are several reasons because of that. One is just the dramatic, rapid adoption of AI. The build out of AI infrastructure is certainly supporting business investment, but where we are seeing slowing is consumer spending,” Guatieri said

“Overall, real GDP in the U.S. has down shifted to just under a one and a half per cent annualized rate in the first two quarters of the year, so well below what we were seeing growth close to three per cent last year. The economy is taking a bit of an impact.”

Canada’s economy, meanwhile, contracted in the second quarter as steel, aluminum and auto sectors were particularly hard hit with separate tariffs between 25 per cent and 50 per cent. Guatieri said that while it may avoid a technical recession, downside risks will persist until the United States-Mexico-Canada (USMCA) agreement is renegotiated next year.

“For Canada, it’s a tough one, because right now, really the only pain that we’re feeling right now we saw it in the second quarter, with our economy contracting, is all because of the tariffs imposed on those three sectors, steel, aluminum and motor vehicles,” said Guatieri.

Real GDP contracted 1.6 per cent annualized in the second quarter amid pandemic-like drops in exports and business equipment investment. Still, he said they now expect the economy to avoid a ‘technical’ recession and expand slightly in third quarter.

Consumers are also showing some resiliency, with real spending up 4.5 per cent annualized in the second quarter and auto sales revving higher in July.

He said home sales are turning around after struggling for three years, but market conditions still vary widely by region.

Despite deals with some major U.S. trading partners, he says the trade war endgame remains unclear, as deals with Canada, Mexico and China remain elusive. He said if the U.S. were to walk away from the USMCA after giving six months’ notice, Canada’s economy could face a deep downturn.

Joshua Santos
Journalist, BNNBloomberg.ca