Trump’s tariffs could flatten growth for U.S. economy, says RBC report

The Economic Impact of U.S. Tariffs: A Growing Concern for Canada and the U.S.

The U.S. tariffs imposed by President Donald Trump on several countries, including Canada, Mexico, and China, have sparked significant concerns about their economic implications. A recent report by the Royal Bank of Canada (RBC) warns that these tariffs could cause substantial damage to both the Canadian and U.S. economies. While the immediate impact may seem localized, the ripple effects of such sweeping measures could resonate globally, affecting trade relationships, consumer prices, and overall economic stability.

Canada Faces Recession Risks

The report highlights that Canada is particularly vulnerable to the long-term effects of these tariffs. If the tariffs remain in place for an extended period, Canada could potentially slide into a recession within the next six months. A recession is typically defined as two consecutive quarters of economic contraction, and the RBC economists warn that the tariffs could disrupt key industries and trade flows, leading to such an outcome. The auto manufacturing sector, which relies heavily on cross-border trade, is particularly exposed to these risks. Given the interconnected nature of the North American economy, the consequences of a Canadian recession could also spill over into the U.S. economy.

U.S. Economy Likely to Experience a Slowdown

While the RBC report suggests that a full-blown recession in the U.S. is unlikely, it does predict a significant economic slowdown. The three countries targeted by Trump’s tariffs—Canada, Mexico, and China—account for 40% of all U.S. trade. This heavy reliance on international trade means that prolonged tariffs could stifle economic growth in the U.S., potentially leading to a period of no growth by 2025. The report emphasizes that the longer the tariffs remain in place, the more severe the impact will be on both economies.

The Manufacturing and Agriculture Sectors Take a Hit

The North American manufacturing sector, particularly the automotive industry, is at significant risk due to the tariffs. U.S. intermediate products play a crucial role in the auto production supply chain, with goods crossing the border multiple times during the manufacturing process. Disrupting this flow could lead to delays, increased costs, and reduced production, ultimately harming the industry as a whole.

The agriculture sector is also expected to suffer, as Canada, Mexico, and China account for roughly half of U.S. agricultural imports. Additionally, China alone is responsible for nearly $100 billion in U.S. non-durable imports, including chemicals, pharmaceuticals, paper products, and textiles. The tariffs could lead to shortages and price hikes for these essential goods, further straining the economy.

Consumers Bear the Burden of Higher Prices

One of the most immediate and tangible effects of the tariffs will be on American consumers. The RBC report projects that inflation could rise above 3% by the end of 2025, driven by higher import costs. This increase in prices will be felt acutely by low- and middle-income earners, who spend a larger portion of their income on essential goods. The report warns that these groups will bear the heaviest burden of the tariffs, as they have less financial flexibility to absorb higher prices. Additionally, the U.S. may struggle to find alternative sources for imports, particularly for goods like aluminum, lumber, and energy products, where Canada, Mexico, and China account for 60% of imports. This dependency could make it difficult to mitigate the effects of the tariffs in the short term.

Conclusion: A Challenging Road Ahead

The RBC report paints a concerning picture of the potential consequences of President Trump’s tariffs. While the U.S. economy may avoid a full recession, a slowdown is almost inevitable, and Canada may face even more severe challenges, including a potential recession. The auto and agriculture sectors are particularly vulnerable, and consumers will likely face higher prices and reduced purchasing power. The report underscores the interconnected nature of the global economy and the potential risks of protectionist trade policies. As the situation continues to unfold, it remains to be seen how long the tariffs will remain in place and what steps will be taken to mitigate their effects. One thing is certain: the road ahead will be challenging for both the U.S. and Canada.