For Trudeau’s successor, preserving Canada’s economy was a ‘daunting’ task Business and economic news

The return of United States President Donald Trump to the White House has dealt a blow to managers of Canada’s $2.1 trillion economy.

Already battered by domestic pressures such as stagnant growth and a housing crisis, Ottawa now faces the threat of tariffs from the US, its largest trading partner.

Trump’s promise to steer the US on a protectionist course poses major challenges for whoever replaces Prime Minister Justin Trudeaudeeply unpopular leader in the country’s departure, ahead of national elections that could be held as early as May, economists say.

“It’s a daunting task for whoever takes over from Trudeau because it’s a short on-ramp from there to a snap election,” Tony Stillo, director of Canada Economics at Oxford Economics, told Al Jazeera.

“It is very difficult. The electorate appears ready for a change and Trudeau may bolster public support for the Liberal Party with a new face, but it may not be enough.”

While tariffs were barely mentioned in Trump’s inauguration speech on Monday, any hope of a delay was dashed hours later when he announced he could impose 25 percent tariffs on Canada and Mexico as early as February 1.

“What happens to Canadian exports in the event of a tariff war with the U.S. — that’s a big determinant of economic outcomes because 80 percent of our exports go to the U.S., and that’s an awful lot of vulnerability,” Lars Olsberg, Dalhousie Professor of Economics at the University of Halifax , Nova Scotia, they told Al Jazeera.

Canadian exports to the US alone account for about 20 percent of gross domestic product (GDP).

A 25 percent tariff would have a “significant” effect on the Canadian economy, potentially triggering a recession, Stephen Brown, deputy chief economist for North America at Capital Economics, told Al Jazeera.

Brown, however, said Trump’s threats of tariffs could be used to gain leverage in negotiations over the United States-Mexico-Canada Agreement, which is up for review next year. Trump is a negotiator and “will ask for concessions so he can say he has a good deal,” Brown said.

Trump has made it clear that there are three areas of concern regarding Canada: the trade deficit, border security and Canada’s relatively low defense spending in NATO.

Ottawa could deal with them in one fell swoop if it decided to buy more defense equipment from the U.S., Brown said, allowing it to meet NATO spending targets and bolster border security.

Canadian officials also have some leverage since the country provides about 20 percent of the crude consumed south of the border and could theoretically cut off supplies, he said.

Last week, Canadian Foreign Minister Melanie Joly told reporters that Ottawa was ready to respond to the tariffs.

“We’re ready for the second round and we’re ready for the third round,” Joly said.

After Trump’s comments Monday night, Canadian Finance Minister Dominic LeBlanc said it would be a “mistake” for the U.S. to continue with tariffs.

“It would be a mistake in terms of the cost of living in the United States, in terms of jobs in the United States, security of supply chains,” LeBlanc said.

A trade war in North America would deal a “body blow” to the US economy, resulting in slower growth and higher inflation, unemployment and fuel prices, Oxford Economics said in a note on Tuesday.

Still, there is also the reality of a “lame duck” prime minister who will have to deal with the US administration, Stillo said.

Domestic pressures

Trump aside, Trudeau and his Liberal Party are under pressure domestically amid widespread discontent over unaffordable housing and the state of public services like child care and health care.

Another obstacle to the government’s popularity was the carbon tax, which became the rallying cry of the opposition Conservative Party, led by Pierre Poilievre.

Introduced in 2019 to encourage the transition to cleaner energy, the tax has quadrupled to C$80 ($55.5) per ton, and is slated to reach C$170 ($118) by 2030.

In this sense, the opposition leader Poilievre promised to “reduce taxes”.

While scrapping the tax would reduce petrol pump prices by 25 cents a litre, scrapping the carbon pricing scheme would also end rebates given to eligible individuals and families to offset the cost of higher fuel prices.

“While the net effect on most households is likely to be a wash as well, it will vary for individual households depending on their specific driving habits,” Stillo said.

Then there is immigration.

While immigration has helped Canada’s population grow by about 1 percent on average each year over the past decade, the population is set to grow by 3.2 percent between 2023 and 2024, the largest annual increase since the 1950s.

Blamed for exacerbating pressures on Canadian housing, health and education, Trudeau announced in October a sharp cut in the reception of migrantschanging many lives and business plans in the process.

“One of the tragedies of the Trudeau era is that the consensus on immigration looks pretty shaky,” said Dalhousie University’s Osberg.

In an October poll released by the Environics Institute for Survey Research, 58 percent of Canadians said the country is accepting too many immigrants, an increase of 14 percentage points from 2023. That followed a 17 percentage point increase between 2022 and 2023.

The rise in negative sentiment toward immigration over the two-year period was the fastest change since the Environics Institute began asking the question in 1977, the institute said.

The results also showed that the share of Canadians who say there is too much immigration has reached its highest level since 1998.

Although anti-immigration political parties have made little progress, a growing number of Canadians are for the first time expressing doubts about who is being admitted to the country and how well they are integrating into Canadian society.

For years, Canada has focused its immigration policy on skilled migrants, Olsberg said, except for a brief period after the COVID pandemic when small businesses complained they couldn’t find workers.

“Now you have people working [coffee chain] Tim Hortons and [department store] Canadian Tire on temporary work visas. Those are permanent jobs, but now you’re stuck with the consequences,” he said.

Some of the changes in immigration policy are already beginning to trickle down to the economy, including a reduced number of temporary resident visas issued. Coupled with looser mortgage lending rules, housing availability is shrinking and rents are starting to fall.

In addition to the slowdown in immigration that helped drive growth, the next government will also face long-standing structural problems, including low productivity and weak business investment, experts say.

“Increasing inequality and increasing insecurity creates a lot of anger and anxiety,” Olsberg said.

“Then comes COVID, a huge danger out of nowhere, and then suddenly there is a big war in Europe. The world is changing around us. Pierre Poilievre was very adept at focusing his anger on Trudeau, and now here is agent of chaos Donald Trump. All that anger and anxiety is at the heart of the problem.”