By Vipal Monga

TORONTO -- President Trump's tariffs are starting to take a big bite out of Canada's economy.

The U.S.'s second-largest trading partner is flirting with recession, unemployment has risen to its worst non-pandemic levels in almost a decade, and business investment has stalled. A country that sends three-quarters of its exports to the U.S., Canada has proven uniquely vulnerable to Trump's tariffs on automobiles, steel, aluminum and lumber.

Prime Minister Mark Carney has said the U.S. trade war will cause permanent damage to the Canadian economy, lowering growth over the long term.

Nowhere is the toll of Trump's trade policies more apparent than in Canada's manufacturing heartland, a 740-mile corridor that stretches from Quebec City to Windsor, Ontario, just across the border from Detroit. The provinces of Ontario and Quebec, home to more than 33,000 manufacturing businesses, have been reeling.

Last month, Stellantis decided to move production of Jeep Compass cars to Illinois from Brampton, Ontario, citing a 25% tariff on automobiles made in Canada. Arnold Branco is one of 3,000 workers at Stellantis's assembly plant who have been on an extended layoff since 2023, waiting for the factory to complete a retooling so the company could build the Jeep cars there. Now, they are facing the prospect of permanent job losses.

"It's a nightmare," said Branco, 64 years old, who had worked at the plant for 38 years. "Trump threw a twist into the whole thing."

Brampton, a city of 790,000, will have to deal with the fallout of not only losing those jobs, but also the impact on the auto-parts suppliers and other businesses like restaurants that served the community, said Mayor Patrick Brown.

"It was a gut punch," he said.

The unemployment rate in Ontario, Canada's most populous province, was 7.9% in September, above the national rate of 7.1%. The rate in the auto-manufacturing hub of Windsor is higher than 11%. The province's gross domestic product is projected to grow only 0.9% this year and 1.0% next year, according to a report by the Financial Accountability Office of Ontario.

Quebec, home to large steel and aluminum smelters and pulp-and-paper and forestry industries that employ more than 80,000 people, might grow only 0.6% this year and 0.9% next year, according to BMO Economics.

Canadian manufacturing exports, almost all of which go to the U.S., were 15.6% lower in August than in February, the last month before Trump imposed new tariffs, said Dennis Darby, president of the Canadian Manufacturers & Exporters industry group. The sector has lost 35,000 jobs since the end of February, while business investment has stalled. Few companies are willing to invest in existing factories or open new ones as long as trade uncertainty persists, he said.

"Canada is not in a great position right now," he said.

The malaise in Canadian industry has weighed on the whole economy. Canada's projected growth rate of 1.1% in 2026 ranks 30 out of 38 in a recent OECD forecast, which projected an average growth rate of 1.5% for member countries.

Tiff Macklem, the governor of the Bank of Canada, last month said the tariff war had "destroyed some of the capacity in this country." The central bank cut interest rates and issued a forecast of "very modest growth." The economy shrank by 1.6% in the second quarter, and a rebound in the months since has been tepid.

Adjusting the economy to account for a more protectionist U.S. won't be easy. Ever since the free-trade era kicked off with a Canada-U.S. trade deal negotiated between former President Ronald Reagan and former Prime Minister Brian Mulroney in 1987, Canada's industries have become progressively more intertwined with the U.S.

"We went from having our own small copy of the U.S. industrial base in Canada to service the Canadian market to just being part of a bigger North American market," Darby said. "It will take a lot of time and capital to reshore manufacturing capacity back in Canada."

Carney acknowledged as much on Tuesday. His government laid out a federal budget that proposed capital spending and tax incentives of roughly 280 billion Canadian dollars, or the equivalent of nearly $200 billion, over the next five years to boost investments in the Canadian economy.

The Canadian government's new spending plans will push Canada's deficit to its highest levels since the financial crisis.

Such measures are needed to bolster companies that are too uncertain to move ahead with projects, said Jim Jarrell, president of Linamar, an auto-parts and industrial-equipment manufacturer based in Guelph, Ontario. The company employs 33,000 people in North America.

"There's a ton of fear," Jarrell said. Canada had neglected investment and diversifying its economy for too long, he said. "That was a wake-up call from the Trump administration: We better do something different, and we can't just rely on our big brother in the U.S."

In Brampton, the Stellantis decision came without warning, said Vito Beato, president of Unifor Local 1285, which represents the 3,000 workers at the Stellantis factory. Workers were notified of the plant's indefinite pause by voicemail. Some have been offered a chance to move to Windsor and apply for jobs at a plant that makes minivans. Stellantis plans to add a third shift to the factory next year, adding roughly 1,500 jobs.

The Canadian government is trying to hold Stellantis accountable for what it argues is a breach of faith. Canada's industry minister, Melanie Joly, said on Tuesday that she has begun a dispute-resolution process to recoup some of the tax dollars the government has given the automaker in recent years.

A Stellantis spokeswoman declined to comment on the Canadian government's action. "We continue to work constructively with government partners and other stakeholders on a plan for Brampton to find viable solutions that build a sustainable, long-term future for automotive manufacturing in Canada," she said in a statement.

From the Canadian government's point of view, Stellantis had agreed to keep the Brampton plant running as part of those tax deals, and Stellantis is now in violation of its contract, Joly said.

"We will fight for every single job in the auto sector," Joly said in an interview last month. "We are in a complicated world where trade tensions are going to be a part of our everyday life."

Write to Vipal Monga at vipal.monga@wsj.com

(END) Dow Jones Newswires

November 06, 2025 20:00 ET (01:00 GMT)

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