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North American economies are feeling the strain from tariffs as spending, production, hiring and international trade slow down.
A trade war among members of the Canada-United States-Mexico Agreement (CUSMA) has disrupted investment plans and the supply of essential components and materials that businesses need to produce their final products.
With the cost of tariffs being passed on to consumers, inflationary pressure is building across the continent. Rising inflation expectations have prompted the Bank of Canada and the Federal Reserve to halt interest rate cuts. The economic uncertainties created by tariffs come against a backdrop of high indebtedness among North American households, making them vulnerable to economic shocks.
Housing prices have been elevated, putting homeownership out of reach for many. High mortgage rates have suppressed new home construction, and increased immigration has put upward pressure on rental prices. However, there are signs that recent immigration policy changes could be starting to ease the pressure on the housing market.
Given these vulnerabilities, the trade war has increased the risk of recessions across North American economies. Central banks across the continent are likely to ease monetary policies to help support their domestic economies.
Opportunities for Canada
Faced with trade friction from the United States, Canada and Mexico could do more to strengthen trade and investment to support their economies. Considering the logistical advantages offered by proximity, many products that Mexico imports from China can easily be sourced from Canada. Of the US$114 billion worth of products that Mexico imports from China, Canada exports about US$4.8 billion worth of comparable products to China, including autos and parts. There are great opportunities for Canada to expand the productive capacities for products that Mexico sources from China, as well as increasing its direct investment in Mexico.
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With growing risks, Canadian companies face new challenges. EDC’s Global Economic Outlook offers insights to help you make better business decisions.
United States: Economic outlook dims as tariffs take hold
The outlook of the U.S. economy has dimmed. Economic activities contracted in the first three months of this year, and indicators are pointing to weaker growth in the second quarter. Private consumption and investment stalled in April, while consumer and business confidence remains weak. The labour market is also softening, with non-farm payroll gains averaging 130,000 a month from January to June, down 21% compared to the same period last year. Meanwhile, student loan repayments have resumed after payment freeze was lifted May 5. These indicators suggest reduced consumer spending in the coming months.
Businesses need clarity to plan investments and operations, but the uncertainty caused by tariffs has dampened business activities and hiring. Stiff tariffs on imports will lead to sticker price shocks for consumers.
Meanwhile, key inflation indicators are blinking red. Rising inflation pressure and a weakening economy present a difficult policy choice for the Federal Reserve (Fed). However, given that the bottom hasn’t fallen out of the labour market, the Fed may push rate cuts towards the end of the year.

Mortgage rates and housing prices are unlikely to return to pre-pandemic levels. Punishing countervailing and anti-dumping duties on Canadian lumber to the United States have been raised to 34%, adding around US$9,000 to average U.S. home prices and stifling the construction of new homes. New home construction dropped 9.8% to 1.256 million units in May—the lowest in five years—and the outlook doesn’t look promising for the balance of the year. Immigration enforcement actions are depriving several sectors, including the construction and agriculture industries, of skilled workers and raising wage costs.
Tariff negotiations are underway. The U.S. and China have reached a deal on a tariff framework that will ease export controls. Deals with India and the United Kingdom are also in place. Meanwhile, CUSMA negotiations are set for next summer. While the tariff war is likely to slow the progress of the U.S. economy, a recession is unlikely. Real gross domestic product (GDP) is forecast to slow to 1.4% this year from 2.8% last year, before advancing to 1.6% in 2026, as trade friction eases.
Canada’s economic outlook reflects the strain of tariffs: 50% on steel and aluminum, 10% on energy and potash and 25% on all other non-CUSMA compliant exports to the United States. This presents strong headwinds for the Canadian economy. While Canadian exporters have increased their CUSMA compliant rate from 34% at the beginning of the year to 56% as of April, this still leaves a sizable portion of Canadian exports under the crushing weight of a 25% tariff.

Canadian retaliatory tariffs on imports from the U.S. are filtering into consumer prices, presenting a policy dilemma for the Bank of Canada. Given the dire weakness of the Canadian economy, the Bank of Canada is likely to err on the side of caution and cut interest rates further before the year ends.
The volatility in tariff announcements has caused uncertainty among businesses and led to a decline in business and consumer confidence, resulting in investment and operational hesitation, as well as job layoffs. The unemployment rate peaked at 7% in May—the highest since October 2021—and further job losses could push the jobless rate higher and put the livelihood of Canadian households in jeopardy.
The U.S. tariff threat has also negatively impacted the U.S. dollar and, as a result, forced the Canadian dollar to appreciate above US$0.73 by mid-June. Given that negative market sentiment against tariffs continues to weaken U.S. investor confidence, the value of the greenback is likely to erode further and help lift the loonie. The loonie is likely to rise through the balance of the year and reach US$0.76 by the end of 2026.
Mexico: Economic crossroads
Mexico is facing a pivotal economic moment based on two significant developments:
1. Control of three branches of government by the ruling party
Mexico’s judicial reform culminated with the election of 2,600 judges on June 2. The turnout for the election was the lowest in the country’s democratic electoral history, with only 13% of eligible voters casting their vote. Voter apathy to the judicial election demonstrates the lack of support for the overall constitutional reform that saw autonomous institutions either shuttered or lose their independence. The result of the judicial election shows that the Morena coalition has captured the country’s judiciary, putting the three branches of government under the control of the ruling party. This will have direct impact on Mexico’s institutional quality—key to attracting foreign direct investments (FDIs). Some previously announced FDIs have been cancelled or put on hold.
2. High dependency on trade with the U.S.
The U.S. administration’s tariffs are having a chilling effect on businesses looking to set up operations in Mexico. Notably, Honda is moving its planned Civic Hybrid production from Mexico to Indiana, given the 15% tariff on all autos and parts and the 50% tariff on steel and aluminum entering the United States. The U.S. accounts for more than 80% of Mexico’s exports and less than half are CUSMA compliant. This means that more than half of Mexican exports are subject to 25% tariffs. The tariffs will tilt the Mexican economy into recession this year, with economic activities remaining weak into the first half of next year. Once the CUSMA negotiations are completed next summer, economic activities will pick up, with an overall real GDP forecast to average just 0.9% in 2026.

These development are impacting the Mexican economy. Job prospects at home are slim, and Mexican undocumented immigrants in the United States are facing a far more consequential deportation situation. To avoid being caught, some are sheltering in place. This will dry up a key source of income for Mexicans who rely on remittance for daily support and impact overall consumption.
The Mexican government has been careful not to impose tariffs on goods imported from the U.S. to avoid raising inflation and slowing domestic production. Given flagging domestic demand, the Central Bank of Mexico is likely to reduce its policy rates to support the economy.
How EDC can help Canadian exporters
Export Development Canada (EDC) offers several solutions, including market intelligence and business connections, to support Canadian companies in their global expansion. Our sector-focused teams have a range of knowledge and expertise.
On March 7, the Government of Canada announced $6.5 billion in support for businesses impacted by the current trade uncertainty, including the launch of EDC’s Trade Impact Program (TIP). With this newly launched program, EDC is facilitating an additional $5 billion over two years in support to eligible companies across a range of products to help them navigate economic challenges.
“We have local knowledge of how to do business in different markets, but we also have the right people who have the connections, and we can leverage that benefit to Canadian exporters,” says Jorge Rave, EDC’s regional vice-president for Latin America and the Caribbean.
“We have a significant and strong Team Canada, including the Trade Commissioner Service, as well as our guides on local culture and doing business as a Canadian exporter,” Rave says.
Additional resources
- To learn more, check out our U.S. market intelligence page for insights on how to navigate that country.
- EDC’s Export Help Hub covers the globe and can connect you with EDC trade advisors who can answer your questions, help you understand your challenges and help you find solutions for them. They specialize in markets and strategies and customs and regulation requirements.
- EDC offers the Business Connections Program, which promotes Canadian export capabilities to international buyers.
- For Canadian exporters who need to mitigate risk, EDC offers financial and risk management solutions and tools, including the Country Risk Quarterly.
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Already an EDC customer and need to stay informed on the current U.S. business environment and issues related to Canada-U.S. trade? Contact your EDC relationship manager or call us at 1-800-229-0575.