Why Canada’s economy is facing a turbulent four years – regardless of a Trump or Harris win

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Canada is facing a rocky four years.

The results of Tuesday’s U.S. presidential election carry massive implications for the Canadian economy, which depends, in large part, on a healthy trade relationship with its wealthy southern neighbour.

Democratic Party candidate Kamala Harris has pitched an “opportunity economy” with lower costs for health care and housing, and higher taxes on corporations and the wealthy, without significantly deviating from the policies of her 2020 running mate, President Joe Biden.

Republican challenger Donald Trump favours more of a scorched-earth approach, promising mass deportations, huge tariffs and tax breaks that challenge economic orthodoxy.

“She’s sort of ideologically a protectionist and he’s just who he is: It’s all sort of a transaction that he needs to be seen to win,” said David MacNaughton, who was Canada’s ambassador to the United States during Mr. Trump’s first stint as president.

A lot depends on how the rest of the vote pans out. If either party takes control of both houses of Congress and the presidency, that could pave the path for significant change, whereas a divided government would limit their ambitions.

And while Mr. Trump’s policies pose by far the greatest uncertainty to this country’s economy, Canada’s deep trade ties to the U.S. mean there will be spillover effects either way.

On issues from migration and markets to energy and taxation, here are the Canadian implications of a Harris or Trump victory.

Trade

Trade is a zero-sum game for Mr. Trump.

“Instead of American workers worrying about losing their jobs to foreign nations, I want foreign nations to be worried about losing their jobs to America,” he said at a recent rally in Detroit.

To that end, Mr. Trump has promised a 10-per-cent to 20-per-cent tariff on all imports into the U.S., and much steeper levies on Chinese goods, Mexican cars and other products he claims are undercutting American manufacturing. That’s a step change from industry-specific tariffs he imposed during his first stint in the White House, which included levies on Canadian steel and aluminum.

This poses a major risk to the Canadian economy. More than 70 per cent of Canada’s exports go to the U.S. – worth around $650-billion in 2023. A large amount of business investment is premised on seamless access to the much larger market to the south.

Economists have come up with a range of estimates on the potential impact. University of Calgary economist Trevor Tombe calculates that a 10-per-cent U.S. universal tariff, combined with retaliation from other countries, could shave more than $45-billion off the Canadian economy and lead to a 1.6-per-cent drop in productivity.

Desjardins economists estimate that Canada’s economy could be as much as 1.7 per cent smaller by 2028 than a baseline scenario in which Ms. Harris wins. The Bank of Nova Scotia sees a peak hit to gross domestic product of 3.6 per cent combined with inflation that is 1.7 percentage points higher than the baseline.

Ms. Harris is less of a threat to the status quo, but she is hardly a free trader. While in the Senate, she voted against ratifying the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement during Mr. Trump’s term. She’s been Vice-President in an administration that has kept many of Mr. Trump’s tariffs in place and raised some dramatically.

“The whole U.S. political class has moved more protectionist and isolationist,” said Mr. MacNaughton, the former ambassador.

Mr. Trump and Ms. Harris both say they will reopen the USMCA when it comes up for review in 2026. Either could push for changes to “rules of origin” to favour U.S. automakers and demand more access to Canada’s supply managed dairy and poultry sectors. Trade irritants, such as Canada’s digital services tax, will be in the crosshairs.

“If Harris wins, she’s likely to follow the process of going to the [USMCA] review in 2026,” Mr. MacNaughton said. “I can’t imagine that Trump would wait, regardless of what the details of the agreement say. He’s going to be talking tariff, tariff, tariff, right out of the starting gate.”

Markets

Financial markets have gone all-in on the “Trump trade.” In recent weeks, U.S. Treasuries have sold off and bond yields have risen sharply. The U.S. dollar has strengthened against other currencies, including the Canadian dollar.

There are two things at play: deficits and tariffs. Given his tax-cutting agenda, Mr. Trump would likely run much larger deficits than Ms. Harris. That’s already putting upward pressure on interest rates, as bond investors demand a higher premium to keep shovelling money into the U.S. Treasury.

Mr. Trump’s proposed tariffs would also be inflationary, at least in the near term, making it harder for the U.S. Federal Reserve to cut interest rates. Higher U.S. interest rates strengthen the country’s dollar vis-a-vis other currencies, while tariffs put downward pressure on the currencies of countries that are targeted.

“The market hasn’t fully priced in a Trump win, but partially,” said Lorne Gavsie, head of macro and foreign exchange strategy at CI Global Asset Management. “A Trump win with a split Congress, there’s maybe marginal upside to the dollar. I don’t think a Trump win with a red sweep is fully priced at this point.”

If Ms. Harris wins, Treasury yields would likely fall and the U.S. dollar would lose steam.

“What happens there is whatever is priced in for Trump in terms of tariff uncertainty, in terms of the fiscal spend, those need to be priced out,” said Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets.

Whatever happens will bleed north across the border. Canadian bond yields, which underpin mortgage interest rates, partly take their cue from U.S. yields. A stronger U.S. dollar – and its inverse, a weaker Canadian dollar – would make imports from the U.S. more expensive.

That said, it’s not all about the U.S. election. The Canadian economy is much weaker than the U.S. economy, and the Bank of Canada is cutting interest rates faster than the Fed. That divergence feeds Canadian dollar weakness.

“The election narrative and news cycle around it grabs everyone’s attention, but it’s the underlying macro environment that truly matters for how we come out of the election,” Mr. Gavsie said.

Energy

Mr. Trump favours a “drill, baby, drill” philosophy: more crude oil production, lower gasoline prices, less regulation of the fossil-fuel industry and a rollback of the Biden administration’s climate-friendly policies.

But his visions of cheap gasoline may be constrained by an industry that doesn’t want prices to fall too much. U.S. benchmark crude is trading around US$70 a barrel. If those prices fell to US$60 for a lengthy period, U.S. production might plateau or even decline, said Rory Johnston, founder of the Commodity Context newsletter.

“Equity markets will punish [companies] if they go back to their freewheeling, loss-producing drilling ways,” he said.

Several economists have said it’s unlikely that a Trump White House would slap tariffs on Canadian oil, given Mr. Trump’s aim to lower prices. Crude is easily Canada’s largest export to the U.S. by value.

Mr. Trump also wants to scale back the Inflation Reduction Act – a landmark bill from the Biden presidency that makes big investments in clean technology – although this could receive pushback from his own party, because of the copious dollars that are flowing into Republican states.

On fossil fuels, Ms. Harris has softened her stance. She’s recently boasted about record U.S. crude production during the Biden years, whereas she warned oil companies in 2019 about fines or prosecution for their role in contributing to climate change. She’s also ditched a call to ban fracking.

Migration

Mr. Trump’s rhetoric is not subtle – particularly on the topic of immigration. After a Republican win, the U.S. will carry out the largest deportation operation in the country’s history, Mr. Trump has pledged.

As of last year, there were nearly 12 million undocumented residents in the U.S., according to estimates from the Center for Migration Studies, a think tank. And most of those individuals are actively working.

As such, any large-scale deportation would have sweeping effects on the U.S. economy that would likely spill into Canada. “The deportations would shrink the economy largely by reducing the number of potential workers and their demand for goods and services,” read a report from the Peterson Institute for International Economics.

Ms. Harris wants to resuscitate a failed bipartisan deal that would have boosted funding for border security, and she supports tougher standards for asylum claims.

Under Ms. Harris, “if immigration is limited into the United States, we’re likely to have lower numbers into Canada, too, because those are some of the claimants that we get,” said Warda Shazadi Meighen, a partner at Landings LLP, a refugee, immigration and human-rights law firm in Toronto.

In recent years, the federal Liberal Party has sought to poach U.S.-based talent. In 2023, it launched a program for holders of H-1B visas – a popular U.S. work permit for tech employees – to migrate to Canada. One day after opening, the maximum of 10,000 applications were received.

But the federal government may hesitate to roll out the welcome mat again. It recently moved to cut immigration levels and limit the inflow of temporary residents.

“It’s a very different political climate,” Ms. Shazadi Meighen said.

Tax and competitiveness

Ms. Harris and Mr. Trump want to see corporate taxes go in opposite directions.

Ms. Harris has proposed raising the statutory corporate income tax rate to 28 per cent from its current 21 per cent, though that would still be below where it was before Mr. Trump’s 2017 tax cuts.

Meanwhile, Mr. Trump wants to slash the rate to 15 per cent, roughly where it was in the 1930s.

Both would need a compliant Congress controlled by their own party for their plans to become reality. Even so, many economists see competitive pressure building on Canada over the next four years at a time when the country is having a difficult time attracting business investment.

The problem for Canada is that with either Ms. Harris or Mr. Trump in the White House, government here has limited fiscal room to counter their efforts to boost the U.S. economy.

“In response to Biden’s Inflation Reduction Act, Canada had to place some very expensive, large bets on things like battery plants and other manufacturing places, and taxpayer pockets are only so deep,” said Stephen Tapp, chief economist at the Canadian Chamber of Commerce. “When you get into subsidy battles, it’s a situation where Canada is not going to win in the long run.”

The pressures would be all the greater if Mr. Trump’s massive corporate tax cut did go through.

Tony Stillo, head of economics for Canada at Oxford Economics, said in a recent report that Mr. Trump’s corporate-friendly measures, including the tax cut and bringing back the ability of U.S. firms to deduct research and development expenses, could “hurt Canada’s competitiveness and weigh further on Canadian business investment.”

The report estimated that if Mr. Trump wins and Republicans take Congress, non-residential investment would fall nearly 10 per cent below the firm’s baseline estimate by the end of 2029.

Growth

Over the decades Canada’s economy has generally followed the economic cycles of its largest trading partner, so it matters a lot how the U.S. economy performs over the next four years.

Yet even within Team Trump, the messaging isn’t clear. In September, Mr. Trump promised his policies would “reignite explosive economic growth.”

Meanwhile, Elon Musk, who would lead Mr. Trump’s government efficiency commission, said this week the Republican candidate’s economic agenda would create “temporary hardship.” When a user on Mr. Musk’s X platform predicted Mr. Trump’s policies would cause a “severe overreaction” in the economy and crash the stock market, before eventually creating a “healthier, sustainable economy,” Mr. Musk replied, “Sounds about right.”

Embodied in those two scenarios is the chaos and uncertainty a Trump win would entail. While economists generally expect Mr. Trump’s US$7-trillion in tax cuts over the next decade to juice financial markets and provide stimulus to an already strong U.S. economy, the spillover to Canada would be limited.

“A stronger U.S. economy in general is a positive for Canada. But a stronger U.S. economy where borders have thickened and where Canadian investors are not entirely sure they’ll be able to sell into the U.S., that would be an overall net negative for business investment,” Mr. Tapp said.

Economists see a much quieter path unfolding for Canada under Ms. Harris. That said, Canada’s economy has underperformed that of the U.S. over the past four years of the Biden-Harris administration, especially when adjusted for population growth.

With both candidates pushing variations of an America-first agenda, Canada faces more turbulence ahead.