Canada’s economic performance is deeply intertwined with the United States, with the majority of its exports heading south of the border. As tariff pressures mount and trade flows shift, the industrial sector’s resilience and adaptability will be critical to navigating both risks and opportunities in the year ahead.
How Closely Tied Is the Canadian Industrial Sector to the US?
In 2024, Canada exported $596.7 billion CAD worth of goods and services to the US, with that trade accounting for 77% of all Canadian exports. From another perspective, Canadian exports to the US in 2024 were roughly 19% of the size of Canada’s nominal GDP in that same year ($3.1 trillion CAD). The following were Canada’s top export categories to the US in 2024:
- 25%: Crude petroleum
- 14%: Motor vehicles, motor vehicle bodies, and motor vehicle parts
- 8%: Primary metal manufacturing
- 8%: Food
- 8%: Chemicals
- 7%: Machinery
Canada Exports to the US surged in the first quarter of 2025 as businesses sought to stockpile goods ahead of tariffs, but they dropped precipitously by 21% in the second quarter. Following an April 2025 record high, the Canada Industrial Production 12MMA declined in May and June. Historically, Canada Industrial Production and Canada Exports to the US have had a close cyclical relationship.
From the US perspective, trade with Canada is a small fraction of the total economy; however, the US is heavily reliant on Canada for certain goods and industries, such as automotive and aluminum. The imbalance in trade exposure between the US and Canada suggests that Canada’s economy is far more exposed to the terms of trade.
How Are Tariffs Impacting Our Forecast for the Canadian Economy?
We lowered our outlook for Canada Industrial Production by 1.8%–2.6% in April to reflect the likelihood of weaker growth, as tariffs created uncertainty in key Canadian industries. We still expect mild growth in the coming year given accelerating global industrial activity and trends in the Canada Leading Indicator.
The tariff exemption for USMCA-compliant goods applied to about 38% of Canada’s exports to the US in 2024. It is possible this percentage will go up as businesses are incentivized to pursue certification. This exemption insulates a portion of Canadian products, but the majority of exports to the US still face tariffs.
Tariffs may incentivize some production to shift to the US and cause a loss of business for Canadian producers. Even so, it takes time to move production capacity, and some businesses may be hesitant to do so, as tariffs could change with the next administration. The long payback period on a large capital project puts them at risk if policy changes. Additionally, the labor and energy needed may not be available in the US. Changing production to the US may not be a quick fix — or even viable at all. As a result, demand for goods from Canada could be relatively resilient in the coming year. The larger competitive threat isn’t US onshoring, but rather the US sourcing from countries with relatively lower tariff rates.
The US already has close trading ties with Mexico and Europe, and both currently face lower US tariffs than Canada. Tariffs could cause supply chains to reorganize. Canadian producers may lose US market share to a competitor but could potentially gain market share elsewhere. Businesses in Canada are already looking to increase their sales to other nations, a trend likely to persist given the uncertainty surrounding US and Canadian trade.
We at ITR Economics are closely monitoring the evolving tariff environment with Canada. With the global economy gaining momentum, there remains reason to believe that Canada’s economy will generally rise in the coming year, but trade relations are absolutely a challenge. We are also monitoring downside risks from some leading indicators, such as the Canada Purchasing Managers Index
What Should Canadian Businesses, or Businesses With Significant Exposure to Canada, Do to Beat the Cycle in the Current Environment?
It is crucial to carefully review products to ensure they are classified correctly and know your eligibility for USMCA benefits where possible to optimize duty savings and compliance. If that is not an option, try to diversify your international trade relationships beyond the US by looking to enter markets in other countries and by sourcing inputs from a broader range of countries. Keep in close communication with your US partners as you navigate changing tariff policy.
Most of all, be careful not to pull back or freeze up; global conditions suggest that there are opportunities for growth in the quarters ahead. Holding back on investing in the future of your business can be self-fulfilling. Despite US tariffs, enhancing your competitive edge through innovation, added value, and strategic marketing can help you maintain market position in the US.