What a 25% Tariff Would Mean to the Canadian Economy

26 November 2024 By: Sunlite Mortgage0 comments

The prospect of a 25% tariff on all Canadian goods entering the United States is a stark reminder that Canada’s economy is vulnerable to U.S. policy changes. With the U.S. accounting for 77% of Canada’s exports and over 50% of imports, such a sweeping measure would disrupt trade balances, slow economic growth, and create significant challenges for industries and households alike. While the potential impacts are serious, this moment also highlights opportunities for diversification and resilient investment strategies, particularly in multi-residential housing, supported by programs like CMHC’s MLI Select.

The Economic Fallout of a 25% Tariff
A 25% tariff would increase the cost of Canadian goods in the U.S., drastically reducing their competitiveness and slashing demand across key sectors. Industries such as manufacturing, agriculture, forestry, and energy would face immediate declines in exports as U.S. buyers seek alternative suppliers or negotiate lower prices.

Impact on GDP and Trade

• • Canada’s trade surplus with the U.S., valued at approximately USD 90 billion in 2022, would erode or become a deficit.
  • With 30% of Canada’s GDP reliant on exports, this tariff could lead to a 3%-4% decline in GDP, equating to a potential loss of CAD 60-$90 billion annually.
  • Import costs would also rise significantly as Canadian businesses depend on U.S. raw materials like steel and aluminum. The resulting higher production costs would fuel inflation, putting additional strain on households and businesses.

Impact on Employment
A 25% tariff would have devastating effects on employment across Canada:

• Ontario’s manufacturing sector would see factory closures and significant layoffs as demand for automotive parts and industrial goods plummets.
• Alberta’s energy sector would face reduced revenues and slower investment, leading to job losses.
• Agricultural regions like Saskatchewan and Manitoba would struggle to compete in the U.S. market, particularly in commodities like grains, livestock, and dairy.
• Nationwide, layoffs could exceed 500,000 workers, pushing unemployment above 8% and further reducing consumer spending. This would create a feedback loop of declining economic activity, compounding the adverse effects on GDP.

The Ripple Effects on the Housing Market

The housing market is deeply intertwined with economic stability, and a 25% tariff would have significant ripple effects:

• Weakened Demand: Rising unemployment and declining incomes in export-dependent regions like Alberta, Ontario, and Saskatchewan would weaken demand for homeownership, leading to potential price drops of 10% to 20% in some areas.
• Higher Construction Costs: Tariffs on U.S. imports like steel and lumber would increase builders’ costs, slowing new housing developments and tightening supply in high-demand areas.
• Interest Rates and Affordability: The Bank of Canada could lower interest rates to stimulate growth depending on the extent of the economic slowdown. While this might provide short-term relief for borrowers, it signals broader economic instability, which could dampen market confidence.

The Keystone XL Pipeline: A Potential Buffer

The proposed reintroduction of the Keystone XL pipeline offers a lifeline for Canada’s energy sector, mitigating some of the economic damage caused by a 25% tariff. By transporting 830,000 barrels of oil per day from Alberta to U.S. Gulf Coast refineries, Keystone XL could:

• Stabilize Energy Exports: Lower transportation costs would make Canadian crude oil more competitive, even with tariffs, preserving Canada’s trade surplus.
• Create Jobs: Construction of the pipeline would generate thousands of jobs in Alberta and Saskatchewan, stimulating local economies.
• Support Government Revenues: Increased energy revenues would strengthen provincial and federal budgets, providing resources to support other sectors.

While Keystone XL could stabilize energy exports, its benefits would primarily be limited to the energy sector, leaving other industries and regions to face the brunt of the tariff’s impact.

The Case for Trade Diversification

Trump’s proposed 25% tariff underscores the urgency for Canada to diversify its trade relationships. With their expanding middle classes and growing demand for Canadian resources, emerging markets like India and China offer significant opportunities to reduce reliance on the U.S.

Opportunities in BRIC Markets

• India: Strong demand for agricultural products, energy, and clean technology aligns with Canada’s export strengths.
• China: As Canada’s second-largest trading partner, China remains a critical market for natural resources and technology exports.
• Challenges: High tariffs and regulatory barriers in BRIC nations must be navigated strategically, along with geopolitical considerations.

Even a modest 5% increase in trade with BRIC nations could generate an additional CAD 30-$45 billion annually, offsetting some of the losses from reduced U.S. trade.

Why Multi-Residential Housing Is the Resilient Investment

In the face of economic uncertainty, multi-residential properties stand out as a stable and scalable investment option. Unlike single-family homes, which rely on personal income for financing, multi-residential properties are qualified based on their rental income, making them more accessible to investors. Programs like CMHC’s MLI Select amplify these advantages by:

• Providing up to 95% loan-to-value financing, reducing upfront capital requirements.
• Allowing investors to expand portfolios without being constrained by personal income caps.
• Generating consistent cash flow, as rental demand remains robust even during economic downturns.

With more Canadians turning to rentals due to rising homeownership costs and economic pressures, multi-residential properties offer a dependable source of income and long-term growth potential.

A 25% tariff on Canadian goods would challenge Canada’s economy, disrupting trade balances, employment, and housing markets. However, these challenges also present opportunities for innovation and resilience. Canada can navigate this period of uncertainty by leveraging infrastructure projects like Keystone XL, diversifying trade relationships, and focusing on stable investments like multi-residential housing.

For investors, multi-residential properties supported by MLI Select offer unmatched advantages, including scalability, stable returns, and resilience in volatile markets. Now is the time to act, turning today’s challenges into tomorrow’s opportunities.

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