Canadian Firms Absorb Tariff Costs, Keeping Lid on Inflation Amid U.S. Trade War
Ottawa, Canada – August 29, 2025 – As the U.S.-Canada trade war intensifies under President Donald Trump’s tariff regime, Canadian businesses are increasingly shouldering the financial burden of higher import costs rather than passing them on to consumers, helping to contain inflation pressures in the short term. According to Statistics Canada’s third-quarter Canadian Survey on Business Conditions, released August 27, 42% of firms reported not raising prices for customers despite tariff-related cost increases over the past six months. This absorption strategy, driven by competitive pressures and weak demand, has contributed to subdued consumer price growth, even as input costs rise—offering temporary relief to households amid a stalling economy. However, with about 40% of businesses anticipating price hikes in the coming year to offset ongoing expenses, economists warn that this buffer may not last, potentially complicating the Bank of Canada’s efforts to balance growth and inflation.
The survey, conducted from July 2 to August 6, reveals a mixed landscape: A quarter of firms (25%) did pass on tariff costs to customers, while 33% reported no direct impact from the trade dispute. This limited pass-through aligns with broader economic data showing Canada’s inflation at 1.7% in July—below the central bank’s 2% target—despite core measures hovering above it. Prime Minister Mark Carney’s announcement last week to drop retaliatory tariffs on many U.S. imports by September 1 further eases potential price pressures, but the underlying U.S. duties on Canadian goods like steel (50%), aluminum (50%), autos (25%), and broader categories remain a drag on exports and profitability.
The Mechanism: Businesses Eat the Costs
Canadian firms, particularly in manufacturing, retail, and import-dependent sectors, are absorbing tariffs to maintain market share and avoid alienating price-sensitive consumers. Andrew Barclay, an economist with Statistics Canada, noted in an interview that while trade levies are visibly hitting input costs, “there’s not much evidence yet that firms are passing that along to the consumer.” He added, “If you squint hard enough, you can see some signs of tariffs, but it’s not necessarily overt.” This dynamic is evident in the survey’s findings on cost obstacles: 62.2% of businesses expect challenges over the next three months, down slightly from 65.4% in Q2, with inflation cited by 45.2% as a top concern—highest in accommodations, food services, and retail.
The trade war’s origins trace to Trump’s early 2025 actions under Section 232 of the Trade Expansion Act, imposing 25% tariffs on non-USMCA-compliant goods from Canada, escalating to 50% on metals by July. Canada retaliated with 25% duties on $30 billion of U.S. imports, but Carney’s recent de-escalation aims to revive USMCA negotiations. Despite this, exports to the U.S.—75% of Canada’s total—fell 13.1% in Q2, pushing the current account deficit to a record C$21.16 billion. Firms in autos, energy, and metals are hit hardest, with integrated supply chains amplifying costs.
A Bank of Canada analysis from January 2025 modeled tariff scenarios, finding that pass-through to consumer prices starts low but rises gradually over three years, with businesses initially compressing profit margins. In a full-retaliation case (25% U.S. tariffs on non-energy exports and 10% on energy), CPI inflation could face sustained upward pressure, offset initially by excess supply and falling commodity prices. The BoC’s July Monetary Policy Report highlighted that inflationary risks from tariffs are being mitigated by economic slack and subdued demand, allowing the overnight rate to hold at 2.75%.
| Survey Insight | Percentage | Implications |
|---|---|---|
| Firms not passing on tariff costs (past 6 months) | 42% | Delays inflation; supports consumer spending but squeezes margins |
| Firms that did pass on costs | 25% | Localized price hikes in affected sectors like retail and manufacturing |
| Firms unaffected by tariffs | 33% | Primarily domestic or diversified exporters |
| Expecting to raise prices in next year | ~40% | Potential future inflation spike if trade war persists |
| Inflation as top cost obstacle (next 3 months) | 45.2% | Highest in services; signals rising awareness of broader pressures |
Source: Statistics Canada Canadian Survey on Business Conditions, Q3 2025
Broader Economic Context: Stalled Growth and Policy Responses
The absorption trend coincides with a weakening economy: Q2 GDP likely contracted 0.7% annualized, per Bloomberg economists, as exports reverted to 2021 levels and the goods trade deficit hit a record C$19.6 billion. The loonie’s 4.5% year-to-date appreciation to C$1.377 per USD provides some cushion against import inflation but exacerbates export competitiveness. Sectors like automotive (e.g., Magna, Stellantis) benefit from partial USMCA exemptions but face risks from lingering duties.
The Bank of Canada, under Governor Tiff Macklem, is monitoring closely. In a March 2025 speech, Macklem emphasized that monetary policy cannot resolve trade wars but must prevent tariff-induced price shocks from becoming persistent inflation. With rates at 2.75%, further cuts (forecast end-of-period 3.00% in 2025) could support growth if tariffs ease, though escalation might force a tighter stance. Provincial and federal stimuli, including tax deferrals and loan programs, aim to aid affected industries.
RBC Economics’ June 2025 outlook notes that while tariff threats de-escalate, growth remains soft at 0.7% for 2025 (down from 1.8% prior forecast), with inflation peaking at 3% before falling below target in 2026. CIBC’s analysis warns of recession risks if hostilities persist beyond Q2, with unemployment potentially exceeding 8%. However, Canada’s strategic tariff shifts—removing duties on U.S. consumer goods like wine and clothing—signal commitment to USMCA revival, potentially stabilizing inflation at 1.7% CPI.
Future Outlook: Temporary Relief or Looming Pressures?
While firms’ cost absorption has kept inflation in check, sustainability is questionable. A June 2025 StatCan report on tariff impacts showed 32.7% of U.S. importers expecting high business effects, with 42.9% anticipating price increases. If pass-through accelerates, core inflation could exceed 2%, prompting BoC hikes. Negotiations, led by Ambassador Kirsten Hillman and U.S. Trade Rep. Jamieson Greer, offer hope for exemptions, but Trump’s “scattershot” approach leaves uncertainty.
For investors, opportunities lie in diversified sectors like resources (agriculture, critical minerals) poised for global demand, per RBC. Yet, prolonged conflict risks a 2% GDP contraction in 2026. As Carney pushes for de-escalation, Canadian firms’ resilience—absorbing costs to shield consumers—buys time, but the trade war’s endgame will dictate whether inflation stays tame or surges.