Canada’s trade relationship with the United States is becoming more expensive, and the latest figures from the Bank of Canada show how quickly conditions have deteriorated. In its October 28, 2026, Monetary Policy Report, the central bank estimated that the average U.S. tariff on Canadian goods had climbed to 7.5%, compared with 5% in July.
The increase follows another escalation in trade tensions, including new American tariffs targeting Canadian industrial and consumer products. Although approximately 80% of Canadian merchandise exports to the United States still enter duty-free, the businesses caught by the new measures face considerably greater pressure.
For manufacturers, exporters, and workers, the growing tariff burden raises questions about competitiveness, investment, employment, and the future of Canada’s largest trading relationship.
The Average U.S. Tariff Has Risen 50% Since July
The increase from 5% to 7.5% represents a jump of 2.5 percentage points, equivalent to a 50% rise in the average tariff rate over three months. That is a substantial change for a trading relationship that operated with minimal tariffs before 2025. The Bank of Canada’s historical figures show that the average American tariff on Canadian goods was just 0.1% before the current trade disruptions. It subsequently reached 5.9% in October 2025 before easing to 5% by July 2026. The latest increase has therefore pushed the average above its previous levels during this period.
The figure does not mean every Canadian exporter faces a 7.5% charge. The Bank calculates its average using tariff rates weighted by the value of different categories of goods traded. Some products continue to enter the United States without duties, while others face substantially higher rates. This distinction matters because the overall average can obscure serious financial pressures affecting individual industries. A relatively small group of heavily taxed products can experience significant disruption even when most Canadian exports remain exempt.
New 50% Tariffs Are Driving the Latest Escalation
One of the biggest developments behind the higher average is Washington’s decision to impose additional tariffs on selected Canadian products after bilateral trade negotiations broke down in late August. According to the Bank of Canada, the United States invoked Section 338 of the Tariff Act of 1930 to apply a 50% tariff to certain Canadian goods, regardless of whether they otherwise qualified for preferential treatment under the Canada-United States-Mexico Agreement. The affected categories include machinery and equipment, plastics, furniture, and selected wood and paper products. Some products face the new duty on top of existing tariffs.
The consequences extend beyond the companies exporting those products. A Canadian manufacturer producing machinery for American industrial customers, for example, may find that a previously competitive shipment has become significantly more expensive to import. Buyers could demand lower prices, seek different suppliers, or postpone purchases while trade conditions remain uncertain. The Parliamentary Budget Officer reported that American measures announced in August initially affected approximately C$27.6 billion in Canadian exports, with additional restrictions introduced afterward. These developments help explain why the latest increase in average tariffs represents a wider deterioration in market access rather than a minor statistical adjustment.
Most Canadian Exports Still Enter the United States Tariff-Free
Despite the increase in American trade barriers, the Bank of Canada estimates that approximately 80% of Canadian merchandise exports to the United States still enter without tariffs. This reflects the continuing importance of exemptions under the Canada-United States-Mexico Agreement, commonly known as CUSMA. Certain strategically important Canadian exports, including crude oil, other energy products, potash, and critical minerals, also remain exempt from the latest Section 338 tariffs. These protections help explain why the average tariff remains substantially below the 50% rate imposed on some products. Canada’s trade relationship with the United States is therefore still functioning across much of the economy, even as specific industries face severe restrictions.
However, preferential treatment under CUSMA does not automatically protect every shipment. The Canadian Trade Commissioner Service explains that exporters must satisfy applicable rules of origin and ensure preferential treatment is properly claimed. Certain American tariffs, including Section 338 measures, apply even to otherwise compliant products. This creates a complicated environment in which businesses must examine product classifications, manufacturing inputs, and documentation before calculating their costs. For smaller exporters without extensive customs expertise, those requirements can add another layer of expense and uncertainty to international sales.
Canada’s Own Tariff Rate on American Goods Has Also Increased
The latest Bank of Canada figures reveal that the tariff escalation is moving in both directions. Canada’s average tariff on American goods increased from 1.5% in July to 3.9% in October, a rise of 2.4 percentage points. Ottawa introduced new countermeasures covering approximately C$27.6 billion in American imports, including selected steel, aluminum, dairy, agricultural equipment, electronics, and paper products. The measures took effect on September 8, with individual tariffs generally set at 15%, 25%, or 50%. The timeline is important: Washington announced its Section 338 measures in July, implemented them on August 22, and Canada subsequently suspended bilateral negotiations before implementing its response.
While retaliatory tariffs are intended to pressure Washington, they can also create costs for Canadian businesses that rely on American suppliers. A manufacturer purchasing specialized steel or equipment from the United States may face higher expenses unless an exemption or tariff-relief provision applies. The Bank notes that Canada’s latest countermeasures focus primarily on intermediate goods used in production rather than finished consumer products. That reduces some direct retail exposure, but it does not eliminate the possibility of higher prices. Businesses purchasing more expensive components may eventually pass part of those costs to customers.
Manufacturers Are Facing Pressure From Both Sides of the Border
Tariffs create financial challenges that extend beyond the amount collected by customs authorities. The Canadian Trade Commissioner Service confirms that the importer of record is responsible for paying import duties, although commercial contracts can determine how the cost is shared between buyers and sellers. When American importers face higher tariffs on Canadian products, they may negotiate discounts, reduce orders, or seek alternative suppliers. Canadian exporters then face difficult choices about whether to lower their prices, absorb reduced profit margins, or risk losing established customers. For manufacturers operating with tight margins, even a limited number of disrupted contracts can make production planning more difficult.
The Bank of Canada’s third-quarter Business Outlook Survey provides evidence that businesses are already adjusting to these conditions. Information collected after negotiations deteriorated indicated weaker expectations for exports and investment among affected firms. Businesses reported modifying supply chains, improving efficiency, exploring additional markets, and, in some cases, reducing capacity. These changes can be particularly challenging for smaller manufacturers because replacing a supplier or customer often requires additional financing, technical approvals, and transportation arrangements. The broader concern is that companies may postpone long-term investments until they have greater confidence in the rules governing cross-border trade.
Automotive, Steel, Aluminum, and Forestry Businesses Remain Vulnerable
Several major Canadian industries face considerably greater tariff exposure than the national average suggests. The Parliamentary Budget Officer identifies automotive manufacturing, steel, aluminum, forestry, plastics, furniture, and electrical equipment among the sectors most affected by recent trade measures. Canadian government guidance indicates that American Section 232 tariffs on covered steel, aluminum, and copper products range from 15% to 50%, depending on the product and applicable exemptions. Automobiles and trucks face separate 25% tariffs, although qualifying American content in CUSMA-compliant vehicles receives special treatment. Softwood lumber also faces a 10% sectoral tariff, separate from applicable anti-dumping and countervailing duties.
These differences help explain why some Canadian manufacturers face much greater uncertainty than others. An automotive parts supplier in Ontario operates within a highly integrated North American production system, where the origin and composition of components can determine tariff exposure. Aluminum producers in Quebec face different challenges because their products have historically depended heavily on American industrial demand. Forestry operations must navigate both newer trade restrictions and longstanding disputes over lumber duties. For these businesses, maintaining competitive prices requires understanding the specific tariffs applied to their products rather than relying on the national average.
The Impact Is Already Different Across Canadian Provinces
Canada’s exposure to American tariffs varies considerably by province, reflecting differences in industrial activity and export products. According to the Parliamentary Budget Officer’s October 2026 assessment, Quebec’s domestic exports to the United States in the second quarter stood at 92% of their 2024 level. British Columbia’s were at 99%, while Ontario and Alberta reached 105% and 111%, respectively. These figures do not mean tariffs have benefited some provinces or caused every decline elsewhere. They show how export performance has varied as businesses respond to trade barriers, commodity prices, changing demand, and other economic conditions.
Quebec’s weaker performance is consistent with its dependence on aluminum and other tariff-exposed manufacturing industries. Alberta has benefited from the comparatively favourable tariff treatment of energy products, while Ontario experienced a recovery in automotive exports during the second quarter. The differences matter for local economies because manufacturing facilities, resource operations, and transportation networks support employment beyond their immediate workforces. A slowdown at an aluminum producer can affect nearby contractors and service providers, just as reduced vehicle production can influence automotive suppliers. National trade statistics therefore reveal only part of the pressure experienced by individual communities.
Canadian Exporters Are Increasingly Looking Beyond the U.S. Market
Recent data suggest that Canadian businesses are expanding their relationships with customers outside the United States. In research published October 28, Statistics Canada reported that merchandise exports to non-U.S. destinations increased 19.4% in the first half of 2026 compared with the second half of 2025. Exports to the United States increased 11.6% over the same period. Higher shipments of precious metals and energy products contributed to the stronger performance outside the American market. These figures suggest that diversification is becoming increasingly important, although changing commodity prices and international demand also influence the value of Canadian exports.
The monthly figures highlight why replacing American sales cannot happen overnight. Statistics Canada reported that exports to non-U.S. destinations declined 8.5% in August after reaching a record high in July. Meanwhile, exports to the United States increased 8.1%, partly reflecting shipments ahead of newly implemented tariffs. Developing alternative markets requires reliable distribution networks, competitive shipping arrangements, and relationships with foreign buyers. Businesses may also need to adapt products to different technical standards and consumer preferences. The emerging strategy is therefore less about abandoning the American market and more about reducing dependence on a single trading partner.
Higher Tariffs Could Weigh on Jobs, Investment, and Long-Term Growth
The Parliamentary Budget Officer has warned that sustained trade restrictions could produce meaningful economic costs over time. Its October 20 assessment estimated that trade measures introduced since early 2025 could leave Canada’s real gross domestic product 1.4% lower after five years than it would have been under a pre-tariff baseline. If the measures remain permanent, employment could be lower by as many as 185,000 jobs at the peak of the modelled impact. These are projections comparing potential economic outcomes, not evidence that those jobs have already disappeared. The assessment also acknowledges that actual results will depend on how successfully businesses adapt.
The Bank of Canada’s current outlook presents a more resilient near-term picture, even while recognizing the risks. Canadian GDP grew at a reported 3.3% annualized rate in the second quarter of 2026, supported by exports, investment, and consumer spending. However, the Bank expects growth to slow sharply in the fourth quarter as new tariffs weaken export demand and business confidence. Its October forecast projects annual economic growth of 1% in 2026 and 2% in both 2027 and 2028. For workers, the immediate challenge may involve delayed hiring, reduced overtime, or postponed expansion projects rather than widespread layoffs.
The Bank of Canada Faces a More Complicated Inflation Outlook
The tariff dispute is unfolding while Canada’s central bank is already dealing with elevated inflation. On October 28, the Bank of Canada raised its policy interest rate by 25 basis points to 2.5%, citing persistent inflation pressures, particularly those linked to energy costs. Consumer price inflation reached 3.1% in September, and the Bank expects inflation to rise toward 3.5% by the end of 2026. American tariffs on Canadian exports do not directly translate into equivalent increases in Canadian consumer prices. Instead, the domestic effects depend on weaker export demand, Canadian counter-tariffs, changing import costs, and how businesses respond to those pressures.
The central bank expects inflation to remain elevated through much of 2027 before returning close to its 2% target around the middle of 2028. Trade policy remains one of the major uncertainties surrounding that forecast. A negotiated reduction in tariffs could strengthen exports, business investment, and employment, while additional restrictions could weaken economic activity further. The October outlook assumes trade measures announced by October 22 remain in place, meaning the 7.5% average is a snapshot of current policy assumptions rather than a permanent forecast. For Canadian businesses, the central question is whether the next stage of negotiations will restore more predictable access to the American market or create another round of costly adjustments.
