Canada’s escalating trade tensions present a new threat to financial stability, according to a Bank of Canada report published Thursday that warns Canadians may soon feel additional economic pressure as international disputes intensify.
In its latest assessment, the central bank highlighted that brewing trade conflicts—particularly between Canada and its largest trading partners—have already begun destabilizing crucial supply chains and introducing volatility into key commodity markets. This volatility comes at a precarious moment when many Canadian households are still grappling with elevated interest rates and inflation concerns.
“What we’re seeing is effectively a chainsaw being taken to decades of carefully constructed trade relationships,” explains Mélanie Robitaille, senior economist at the Canadian Chamber of Commerce. “When tariffs rise and supply chains fracture, those costs inevitably find their way into consumer prices and business investment decisions.”
The Bank of Canada’s twice-yearly Financial System Review pinpoints three primary channels through which trade tensions could undermine financial stability: direct impacts on export-oriented industries, broader market volatility feeding investor uncertainty, and potential consequences for business credit quality as companies absorb higher operational costs.
Most concerning is the warning that approximately 31% of Canadian GDP remains directly exposed to international trade disruptions—a figure that climbs substantially when considering secondary effects on domestic supply chains. The mining, automotive, and agricultural sectors face particularly acute vulnerability, with the central bank estimating that sustained trade restrictions could reduce annual economic output by 0.5 to 1.2 percentage points over the medium term.
For perspective, consider that Hamilton-based steel producer Algoma Steel recently announced it would delay a planned $700-million facility expansion, citing “unprecedented uncertainty in cross-border business conditions.” The company’s CEO noted in an earnings call last month that “planning capital investments in this environment feels like building on quicksand.”
This hesitation to invest represents exactly what the Bank of Canada fears could become widespread. When companies delay expansion plans, the effects cascade through employment, wage growth, and ultimately consumer spending—creating what economists call a negative feedback loop that can amplify initial economic shocks.
“Trade conflicts don’t just hurt at the border,” says Trevor Tombe, economics professor at the University of Calgary. “They create system-wide uncertainty that makes businesses and consumers more cautious, potentially transforming what might have been a minor economic hiccup into something more persistent.”
The Bank’s analysis reveals that financial markets haven’t fully priced in these escalating risks, suggesting investors may face sudden corrections if trade tensions intensify beyond current expectations. This disconnect between current market valuations and potential trade disruptions represents what Deputy Governor Carolyn Rogers described as a “concerning vulnerability” during Thursday’s press conference.
Meanwhile, households already struggling with higher debt servicing costs could face a double bind if trade disputes trigger additional inflation pressures. Statistics Canada data shows the average Canadian household now spends approximately 15.1% of disposable income servicing debt—the highest level in nearly three decades. Any additional price pressures would further compress already strained family budgets.
“The timing couldn’t be worse for many Canadian households,” notes Preet Banerjee, personal finance commentator and author. “Many families have already depleted whatever financial buffers they built during the pandemic, and now face potential price shocks from trade disputes just as they’re hoping for relief from high interest rates.”
The report also highlighted regional vulnerabilities, with provinces like Ontario and Quebec particularly exposed due to their manufacturing bases and integration with U.S. supply chains. British Columbia faces significant risk through its Asia-Pacific trade connections, especially in forestry and resource exports.
Ottawa’s recent moves to implement strategic tariffs in response to trade actions from major partners raises the stakes further. What started as targeted disagreements over specific industries has expanded to threaten broader economic relationships, with the Bank noting that “retaliatory cycles can quickly escalate beyond their initial scope.”
