North America is at a crossroads with Canada and Mexico getting squeezed by an increasingly combative and competitive United States. President Trump’s return to the White House and focus on illegal migration and drug trafficking will pose challenges for Mexico. The aggressive tax and tariff agenda will pose serious economic challenges for Canada, where over two-thirds of exports are destined for the US. Both countries will need to adapt and forge a new relationship with the US to minimize economic risk.
Meanwhile, Canada is going through a major transition itself with the resignation of Justin Trudeau and a Liberal leadership race to replace him that has left Canada without an effective leader as Trump was inaugurated. The opposition Conservatives hold a massive lead in the polls and will likely form the next government. Whomever wins the 2025 election in Canada, they will need to take bold measures to safeguard jobs, investment, and our quality of life.
Trump’s Tax Promises
During his first term, Donald Trump reshaped the global economic landscape with sweeping corporate tax cuts, slashing the U.S. federal rate from 35% to 21%. These reforms erased Canada’s historic advantage as a lower-tax jurisdiction. Now, Trump’s second act promises to cut the U.S. corporate tax rate even further—to 15% for manufacturers who produce goods domestically. Additional incentives, such as expanded R&D credits and 100% bonus depreciation on capital investments, aim to lure manufacturing and innovation out of Canada and Mexico despite a history of free trade and integrated supply chains. Both Canada and Mexico will need to meet or match many of the Trump’s measures to remain competitive.
Trump’s Tariffs Threat
Over the course of the US Presidential election, Donald Trump threatened to have a general tariff against all countries with a much higher tariff policy against China. He has suggested tariffs in the 10%, 20% and even 25% range against Canada and Mexico, who have long enjoyed preferential access to the US market. Canada has enjoyed integrated automotive and defence supply chains since the 1960s, and as a result sees over 70% of Canadian exports go to the US. Tariffs threaten this important market with Canadian banks estimating a GDP reduction of up to a 5.6% if Trump implements a 25% tariff and if Canada responds with dollar-for-dollar retaliatory tariffs.
Given the extreme risk of inflation that a major tariff war would cause over time, it is unlikely that President Trump will apply across the board tariffs on his partners for too long. It is likely that Trump will exempt some strategic sectors in Canada like energy and defence from the application of tariffs, or lower tariffs quickly if Canada makes greater investments in border security and defence. The tariffs are both a negotiating tool for Trump and a permanent change to trade policy, so Canada and Mexico will likely acquiesce to some Trump’s demands in return for a reduction or removal of tariffs.
Political Uncertainty in Canada
Justin Trudeau’s resignation in January 2025, along with his prorogation of Parliament, marks the end of the modern Trudeau era in Canada and an end to the hyper-progressive agenda he promoted on everything from climate change to foreign policy. The race to replace Trudeau has begun, with the leading candidates repudiating the very policies they helped create for Trudeau during his time as Prime Minister. Former Bank of Canada and Bank of England Governor Mark Carney is the early front runner and former Liberal Finance Minister and Trudeau’s Deputy Prime Minister, Chrystia Freeland, is running just behind him in terms of support from Members of Parliament and public attention. Both are now promising to end Trudeau’s carbon tax and increase to the capital gains tax even though they were the top economic advisors for Trudeau when he brought the policies in.
The Liberal leadership race will be decided on March 9, and according to the Westminster parliamentary system in Canada, the winner will become Prime Minister right away. The new Prime Minister will face the return of Parliament on March 24 and will need to deliver a Speech from the Throne followed by a Supply and Budget Bills by early April. All of these measures will trigger votes of confidence that could topple the minority Liberal government.
The reality is that the next Canadian Prime Minister – either Carney or Freeland – will likely be Prime Minister for only a few months given the dysfunction and division in the House of Commons. There is a small chance that the new leader will forge a supply and confidence agreement with the socialist New Democratic Party to keep them in power until fall. This is due to the fact that Canada is hosting the G7 Leaders Summit in June in the province of Alberta and it would be irresistible for a new Liberal Prime Minister to not try and be viewed as a strong leader hosting other world leaders in Canada at a time that G7 will want to confront President Trump on some of his policies. It will be interesting to see if the Liberals can delay their defeat until after the G7 meetings.
The Canadian Bridge
While there are challenges in North America, there are also great opportunities as well. The reduction in corporate taxes in the United States and the pro-growth agenda of the Trump administration is expected to unleash a massive round of M&A activity and investment in industries ranging from energy to manufacturing to quantum computing to artificial intelligence. Canada will benefit from this indirectly and potentially directly as well. Canada remains an excellent first step for European investors and exporters looking to navigate the United States from North America. Both Canada and Mexico will also be looking for opportunities to do more trade with the European Union, as diversification will be an important defensive strategy. We live in interesting times.