Experts say a volley of tariffs between the U.S. and Canada could tip both countries into a recession and severely disrupt cross-border commerce between the key trading partners. 

A Canadian government official said Wednesday it is exploring potential retaliatory levies on certain U.S. imports after President-elect Donald Trump on Monday threatened to impose a 25% tariff on all goods from Canada and Mexico on his first day in office. The official, who stressed no final decision has been taken, spoke on condition of anonymity as they were not authorized to speak publicly.

Mexican President Claudia Sheinbaum earlier this week also hinted that the country could retaliate against the U.S. with its own tariffs on American products. Trump said the stepped-up duties are necessary to curb the flow of undocumented immigrants and illicit drugs from Mexico and Canada.

“Blanket 25% tariffs on Canada threatened by U.S. President-elect Donald Trump earlier this week would push Canada into a recession in 2025, cause a sharp spike in inflation and force the Bank of Canada to hold rates higher next year,” economist Michael Davenport of Oxford Economics said in a report Thursday.

Inflation in Canada would top 7% by mid-2025, while unemployment would approach 8% by year-end, according to the investment research firm. The country’s auto, energy and heavy manufacturing industries, which rely on exports to the U.S., would take the biggest hit, he added, noting that the sectors also depend on components from American suppliers. 

Canada fired back with duties of its own when Trump slapped tariffs on the country’s steel and aluminum exports to the U.S. during his first stint in the White House. Canada targeted U.S. products including whiskey and yogurt, most of which came from one plant in Wisconsin, home state of then-House Speaker Paul Ryan. 

Canadian officials say lumping Canada in with Mexico is unfair but say they are ready to make new investments in border security and work with the Trump administration to lower the numbers from Canada. The Canadians are also worried about an influx of migrants if Trump follows through with his plan for mass deportations.

U.S. also would feel the pain

Trump and his allies, including his choice for Treasury Secretary, Scott Bessent, have said tariffs deployed during his first term advanced U.S. economic aims, including boosting federal revenue, and didn’t boost inflation.

But the U.S. likely wouldn’t go unscathed in a full-blown trade war with Canada. Across-the-board tariffs on American products would likely cause a “shallow” recession in the U.S. and fracture political relations between the allies, according to Oxford. 

Although the U.S. is the world’s leading oil producer, Canada supplies roughly 20% of the oil used stateside. As a result, U.S. gas prices could shoot up 30 to 40 cents a gallon, and potentially up to 70 cents, soon after Trump levied the tariffs on Canada, Patrick De Haan, head of petroleum analysis at GasBuddy, told CBS MoneyWatch.

With so much on the line, the incoming Trump administration is more likely to impose limited tariffs on Canadian products, such as steel, lumber and farm products like dairy.

“Despite Trump’s latest threat of blanket tariffs, we still think it’s unlikely that the Trump administration will put tariffs on Canadian autos and energy exports, which make up about 40% of total Canadian exports to the U.S.,” Davenport said. “The North American energy sector and auto supply chains are highly integrated across the U.S.-Canada border and any tariffs on these goods would also have a significant negative effect on the US economy.”

contributed to this report.