After months of bullying, U.S. President Donald Trump touched off a trade war with his country’s closest economic partners early Tuesday morning.

By placing 25-per-cent tariffs on imports from Canada and Mexico, with lower 10-per-cent tariffs for energy and critical minerals, Mr. Trump has shattered decades of continental economic integration. Canada and Mexico will be hit the hardest, but U.S. consumers and businesses will suffer as well.

The extent of the pain will depend on how long the tariffs remain in place, and how much Canada and Mexico retaliate. But a full-blown trade war will affect economic growth, employment, prices and profits in all three countries.

Live updates: Follow the latest developments, reaction and analysis on Trump’s tariffs

What’s the economic impact on Canada?

Canada relies heavily on trade with the United States, so the impact of tariffs will be severe. Canada sends nearly 80 per cent of its exports to the U.S., accounting for about one-fifth of the country’s gross domestic product.

Unless Mr. Trump reverses course quickly, a recession appears imminent. Economic modelling by the Bank of Canada shows Canadian exports falling 8.5 per cent in the first year after tariffs are imposed, business investment declining almost 12 per cent and consumer spending contracting by more than 2 per cent by 2027.

“In our January projection with no tariffs, we forecast growth of about 1.8 per cent in both 2025 and 2026. But in the tariff scenario, the level of Canadian output falls almost 3 per cent over two years. That implies tariffs would all but wipe out growth in the economy for those two years,” Bank of Canada Governor Tiff Macklem said in a speech last month.

Private sector and academic economists have published a range of estimates on the impact of U.S. tariffs, but all agree that the impact will be large.

“A couple quarters of contraction are well within the realm of possibility,” Douglas Porter, chief economist at Bank of Montreal said in a note to clients on Tuesday. He estimated that across-the-board tariffs will reduce real GDP growth in Canada by about 1.5 percentage points in 2025, meaning a small annual growth of 0.5 per cent this year, although he said he had little confidence in the forecast “given the lack of historical precedent.” Unemployment could rise to above 8 per cent, up from 6.6 per cent today, he said.

A report by Joshua P. Meltzer at the Washington-Based Brookings Institution foresees a 3-percentage-point hit to Canada’s GDP and a sharp rise in unemployment. “In the event of retaliation, job losses would increase to almost 2.5 per cent and 3.6 per cent of total employment in Canada and Mexico, equivalent to over 510,000 Canadian jobs and 2.2 million Mexican jobs,” Mr. Meltzer wrote.

What provinces will be hit the hardest?

The impact of a trade war will be felt differently in each province. Ontario, with its large auto-sector and diverse manufacturing base, is the most exposed. That’s followed by Quebec, which sells transportation equipment, industrial metals (such as aluminum), pulp and paper and chemicals to the U.S.

John McNally, senior adviser at Scotiabank Economics, reports that about 675,000 jobs in Ontario and 359,000 jobs in Quebec are directly tied to exports.

Canada’s energy producing provinces are heavily exposed to the U.S. market, given the millions of barrels of oil sent south every day. But there are things that could mitigate the impact of tariffs. “The lighter 10-per-cent tariff on such products, and the assumption that a portion will be passed to the U.S. consumer, leaves the impact to run smaller in these provinces – at least in the short run,” wrote Mr. Porter of BMO.

Other provinces are less exposed over all, but certain industries could be hit hard, as with B.C.’s lumber industry, which could see tariff rates soar as across-the-board levies are layered on top of existing tariffs.

What industries are most exposed?

Energy products are by far Canada’s largest exports to the United States. Last year shipments of oil, natural gas and power amounted to nearly $170-billion, about one-third of all exports. That means Canadian energy producers are heavily exposed – although they face smaller tariff than other industries, and they may be able to pass along a portion of the cost increase to U.S. buyers, given energy demand in the U.S. and the fact American refineries are fitted out to process crude from Canada.

Canada’s second largest export to the U.S. is automobiles and auto parts, mostly from Ontario. This is where the tariffs could bite the hardest. Canada sent nearly 1.1 million vehicles to the U.S. last year, and Canadian auto parts are a crucial component in North America’s integrated auto supply chain.

Erik Johnson, senior economist at BMO, notes that motor vehicles exports were the equivalent of 2.6 per cent of Canadian GDP, and car sales to the U.S. supported about 160,000 jobs in Canada in 2022. “Even without tariffs in place, the uncertainty is already having an impact. Stellantis recently announced it is pausing all retooling work on its next generation Jeep Compass assembly plant in Brampton. Other automakers could follow,” he said.

Florence Jean-Jacobs, principal economist at Desjardins, published a report in January looking at what industries, beyond energy and autos, are most exposed to tariffs. She concluded that these are: primary metals (including aluminum), food and beverage manufacturing, chemicals, machinery and aerospace.

“The wood, pulp and paper, nonferrous metals and plastics industries could also be hit hard by tariffs … The transportation and wholesale trade sectors would also suffer significant indirect effects from potential tariffs, as would agriculture, fishing and forestry.”

The service sector is much less exposed to tariffs, although “they could still experience ripple effects of any tariff‑induced economic slowdown,” Ms. Jean-Jacobs wrote.

What’s the impact on inflation and interest rates?

Trade wars push up prices. For Canada, that will happen as Ottawa responds with its own tariffs – initially on $30-billion worth of U.S. goods, and rising to $155-billion in 21 days – and the loonie depreciates.

The initial jump in prices could push the annual rate of inflation up to about 3 per cent, Canadian Imperial Bank of Commerce economists Avery Shenfeld and Ali Jaffery wrote in a note to clients last month.

“However, these impacts shouldn’t be overstated. More than half of Canadian consumption is in services, which haven’t yet been the focus of the tariff discussion and in which Canada runs a trade deficit with the U.S. Further, only one-third of Canadian consumer goods imports come from the U.S., with the remaining non-food or energy imports being intermediate inputs or motor vehicles,” Mr. Shenfeld and Mr. Jaffery wrote.

A spike in inflation would also likely be temporary, as the broader hit the economy and the jump in unemployment weigh on price growth, they said.

A trade war is a particularly challenging shock for the Bank of Canada to manage, as it produces what economists call “stagflation” – slower growth and higher prices. That means the central bank has to choose between stimulating the economy with rate cuts and fending off inflation with rate hikes.

As Mr. Macklem put it in a speech last month: “Provided the inflationary impact of tariffs is not too big, monetary policy can help smooth the adjustment by supporting demand so it doesn’t weaken too much more than supply. But how much support monetary policy can provide is constrained by the need to control inflation.”

Financial markets now expect the Bank of Canada to cut its policy rate by a quarter-point on March 12, to 2.75 per cent, and see at least two additional cuts before the end of the year. A number of Bay Street analysts think the bank will have to ease more aggressively than that in the face of a recession.

What’s the economic impact on the U.S.?

The United States is less reliant on trade than Canada and Mexico, which means the impact of tariffs and countertariffs will be less damaging over all. But the U.S. is still shooting itself in the foot by disrupting North American supply chains, pushing up prices and inviting retaliation.

How Trump’s tariffs put thousands of American jobs at risk

The report by Mr. Meltzer at Brookings estimates that American GDP will be about 0.3 percentage points smaller because of the tariffs. That implies about US$75-billion in lost economic output. Meanwhile, the U.S. could lose about 400,000 jobs, Mr. Meltzer estimates, while wages could decline 0.5 per cent.

Yale University’s Budget Lab estimates that in the medium-to-long term, the U.S. economy will be persistently 0.2 per cent smaller than without the tariffs. Moreover, tariffs will put upward pressure on U.S. prices, hitting the consumer and making it more difficult for the U.S. Federal Reserve to lower interest rates.

“The proposed tariff puts upward pressure on the PCE price level of 0.72-0.76 per cent before consumer substitution, depending on the extent of retaliation from Canada, Mexico, and China. Pre-substitution is the best way to gauge the hit to consumer welfare. That is the equivalent of a loss of purchasing power of about US$1,250 on average per household in 2024,” according to economists at the Budget Lab.

“Even after consumers substitute, and assuming the Federal Reserve does not tighten monetary policy to counteract the tariff’s price effects, the level of PCE prices is still persistently 0.6 per cent higher in the medium-term, a loss in purchasing power of about US$1,000 per household in 2024.”