Canada’s sovereign credit rating could come under pressure if its trade dispute with the United States escalates significantly further, according to Fitch Ratings.
The rating agency says Canada’s current AA+ rating should be able to withstand the latest round of tariffs, but a broader trade confrontation could weaken the credit profiles of both the federal government and several provinces.
The warning comes as Canada and the United States exchange increasingly aggressive trade measures.
Canada imposed tariffs on $27.6 billion worth of U.S. goods this week, matching the value of Section 338 duties imposed by U.S. President Donald Trump after bilateral trade negotiations collapsed. Washington subsequently announced bans covering several Canadian products, including alcohol, motorcycles and dairy products, along with additional restrictions affecting aluminum and furniture.
Fitch says current tariffs remain manageable
Despite the escalation, only a relatively small portion of overall bilateral trade is currently affected.
Fitch estimates U.S. tariffs cover approximately five per cent of Canadian exports to the United States, while Canadian tariffs affect about seven per cent of U.S. exports to Canada.
However, the agency warned that further escalation could increasingly test Canada’s economic resilience.
Ontario and Quebec could face some of the greatest pressure because of their exposure to cross-border trade. Both provinces carry AA-/stable Fitch ratings.
British Columbia, which has an AA-/negative rating, is also considered vulnerable because of its forestry and metals industries.
Canada significantly more exposed to U.S. trade
Canada’s economic dependence on the American market remains one of its biggest vulnerabilities in a prolonged trade confrontation.
About 75 per cent of Canadian exports are sold to the United States, representing nearly 20 per cent of Canada’s gross domestic product, according to Fitch.
By comparison, approximately 15 per cent of U.S. exports go to Canada, equivalent to about one per cent of U.S. GDP.
That imbalance means Canada has considerably greater economic exposure if the dispute expands.
Another concern is Washington’s use of Section 338, because the latest penalties apply regardless of whether Canadian products comply with the Canada-U.S.-Mexico Agreement.
Fitch noted, however, that Section 338 has not previously been used in this manner and has not been tested in court. Legal challenges could therefore affect the durability of tariffs imposed under the measure.
Bigger danger would be a wider tit-for-tat trade war
Nathan Janzen, assistant chief economist at Royal Bank of Canada, characterized the latest U.S. response as a relatively limited escalation despite the alarming headlines.
Janzen said the greater economic threat would come from a broader cycle of retaliation covering a substantially larger share of Canada-U.S. trade.
One major risk is the auto industry.
Trump has threatened to increase tariffs on Canadian automobiles and parts to 50 per cent beginning Jan. 1, 2027.
Fitch said such a move would damage both economies because North America’s auto industry is deeply integrated, but the consequences for Canadian economic growth and external balances would likely be more severe.
Further escalation involving steel and aluminum is also possible.
Trade war carries risks for U.S. economy
The United States is not insulated from the economic consequences.
Fitch expects tariffs to contribute to inflation in both countries, but said the U.S. faces greater challenges on that front.
Additional tariff-driven inflation could make it more difficult for the Federal Reserve to cut interest rates and could add pressure to elevated U.S. Treasury yields.
Canada’s lower underlying inflation, meanwhile, gives the Bank of Canada comparatively greater monetary-policy flexibility.
Fitch said it will continue monitoring several factors, including whether courts uphold the U.S. use of Section 338, Canada’s progress in reducing its dependence on the American market and broader political developments that could influence the economic outlook.
For now, Canada’s AA+ rating appears capable of absorbing the latest trade shock. Fitch’s warning, however, underscores that the greater threat would come if the current dispute develops into a much wider trade war affecting autos, metals and a substantially larger portion of the cross-border economy.
