Canadian businesses are navigating a fresh round of cost pressure this fall as an escalating trade war with the United States collides with rising oil prices, complicating the path back to the Bank of Canada’s 2 per cent inflation target and forcing companies to recalculate margins on both sides of the border.
The latest flashpoint came after U.S. Section 338 tariffs took effect on Aug. 22, prompting Ottawa to respond with dollar-for-dollar counter-tariffs on $27.6 billion worth of American goods starting Sept. 8, at rates of 15, 25 and 50 per cent. The federal government paired the retaliation with a new $7.5-billion support package for affected workers and businesses — on top of nearly $25 billion in tariff-related support rolled out over the previous 18 months, according to CBC reporting.
Inflation Ticks Up, But From an Unusual Source
Canada’s inflation rate rose to 3 per cent in July, but Bank of Canada Governor Tiff Macklem said the increase is “very concentrated” in gasoline and oil prices tied to the conflict in the Middle East rather than tariffs themselves. “That’s too high,” Macklem told reporters in Ottawa after the bank held its overnight rate at 2.25 per cent for a seventh consecutive decision on Sept. 2. U.S. benchmark oil prices had climbed roughly 13 per cent since the bank’s July announcement, with tanker traffic through the Strait of Hormuz slowing as hostilities intensified.
Macklem said tariffs will still “add costs for some businesses,” describing the levies as steep but applied to a narrow base of trade. According to analysis from RBC, U.S. tariffs affect about 5 per cent of Canadian exports to the United States and roughly 0.4 per cent of Canadian GDP and employment, while Canada’s retaliatory measures cover about 3 per cent of imports. The Bank’s preferred core CPI measures have held near 2 per cent since April, a relatively healthy starting point heading into the latest trade rift, RBC noted.
Economists remain split on what comes next. Scotiabank’s Derek Holt pointed to the bank’s next forecast round on Oct. 28 as pivotal, predicting 75 basis points of rate hikes beginning in the fourth quarter of 2026 if inflation and trade data cooperate. CIBC’s Avery Shenfeld took the opposite view, saying he sees little prospect of a rate move in either direction this year given the “fog of a trade war” and unresolved tariff questions on autos, metals and lumber. Longer-term borrowing costs have already moved: the benchmark 10-year Government of Canada bond yield rose above 3.80 per cent, its highest level in more than two years, with Senior Deputy Governor Carolyn Rogers saying the bank is watching for signs of market “dysfunction” rather than ordinary repricing.
Businesses Feel Uneven Effects
The practical impact of the counter-tariffs varies widely by company. Derek Friesen, owner of Manitoba-based PhiBer Manufacturing, said new levies on steel trailer frames imported from Iowa will push up sticker prices on equipment that makes up about 70 per cent of his sales, potentially making the product uneconomical. “Farms can’t absorb another big increase like that,” Friesen said.
Others see a mixed picture. Jim Estill, owner of Guelph, Ont.-based Danby Appliances, said tariffs on imported cables used in snowplows will raise his costs modestly but manageably, while a 25 per cent tariff on refrigerators from the U.S. could make his Canadian-made appliances more competitive domestically. “So we may gain a little bit of market share,” Estill said, calling the situation a “double-edged sword” that could still hurt more than it helps if consumers delay big purchases.
Analysts say the government’s targeting reflects an effort to minimize damage to Canadian consumers. Bradley Saunders of Capital Economics wrote that the tariffed goods were largely chosen because they have “readily available domestic alternatives,” limiting the hit to industry while pressuring American exporters. University of Calgary economist Trevor Tombe found nearly three-quarters of counter-tariffed items are industrial supplies used to manufacture other goods, meaning the cost burden falls more on businesses than on retail consumers.
Support Programs Face Criticism
Not everyone is convinced the federal relief measures go far enough. Simon Gaudreault, chief economist at the Canadian Federation of Independent Business, said counter-tariffs pose an outsized risk given that, by CFIB estimates, there are roughly two import-dependent Canadian businesses for every one that exports finished goods to the U.S. He said only about 1 per cent of CFIB members used earlier federal support programs, largely because eligibility rules — including a $2-million revenue threshold — excluded many small firms.
The auto sector remains a particular watch point. RBC estimates 120,000 jobs, or 0.7 per cent of national employment and GDP, are tied directly to vehicle and parts production. Because more than half the value of Canadian vehicle exports to the U.S. comes from American-made parts, RBC argues broader auto tariffs would raise costs across the integrated North American supply chain and hit U.S. exporters nearly as hard as Canadian ones — a dynamic analysts say has so far kept comprehensive auto tariffs off the table.
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