Foreign Affairs Committee on Oct. 21st, 2026

[The Chair, Liberal, Ahmed Hussen]

I call this meeting to order.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, February 12, 2026, the committee is meeting regarding its study of the bilateral relationship between Canada and the United States of America.

I would now like to welcome our witnesses for the first hour. Dr. Trevor Tombe, professor of economics at the University of Calgary, is joining us by video conference; and, from the Canadian Federation of Independent Business, Dan Kelly, president and CEO, is joining us by video conference.

Up to five minutes will be given for opening remarks, after which we'll proceed with rounds of questions from members.

I now invite Mr. Kelly to deliver his remarks of no more than five minutes. Welcome.

[Dan Kelly, President and Chief Executive Officer, Canadian Federation of Independent Business]

Thank you so much. It's a pleasure to be with you all.

The impact of the trade war with the United States is significant on Canadian small businesses. Over the next little while I want to share with you a bit of what we've seen and some recommendations from small businesses on where we may go next. I did send a PowerPoint deck to the clerk. I won't go through the details, but I'll provide a few highlights over the course of the next few minutes.

A full one-third of our members, small business owners, report that they've had major negative impacts from the Canada-U.S. trade war, and that's largely driven by the broader economic uncertainty that the trade war has brought. There are a tiny few that have seen some positive impacts—I think less than 1%—but we've had a full half of small firms report some degree of negative impact from the trade war so far. That is also true for exporters and importers. They are feeling the effects of this right now.

This most recent round of U.S. tariffs has had a big impact as well. Of our members that export to the United States, a full 43% of them have fallen on the list of the section 338 tariffs that the U.S. government has imposed. A similar percentage, about half of our members that import goods from the United States, are now exposed to Canadian retaliatory tariffs. The trade impact is happening in both directions, both the U.S. tariffs on exporters and the Canadian retaliatory tariffs on importers are taking their toll on small companies.

I think that often, in trade discussions, it is thought that the impact of a trade war is primarily felt by large companies, by big resource industries and by big manufacturing plants. However, there are thousands and thousands of small firms that have been directly broadsided by the trade war with the United States, in different directions.

The median monthly cost for small business owners has been about $80,000 so far. That's quite a significant impact on a small company. We've found that nearly one in five of our members who export and about 10% of our members who import have been affected by the Canada-U.S. trade war. They are reporting that they would potentially not last more than three months if the trade war lasts that long. This, of course, was the ratcheting up in the summer of this year, when far more small and medium-sized firms were impacted.

I'll note that, during the first year of the trade war, some of the impacts were probably more broadly felt by large companies. Steel and aluminum, of course, is a big product used in thousands and thousands.... The earlier tariffs, both the U.S. and the Canadian retaliatory tariff, were taking a toll, and that hasn't gone away. Of course, we've now seen, with the new round of tariffs that came into effect over the summer, a far broader range of small firms that were affected by this.

The sad part is that many small firms report that they just cannot pass these costs on to their customers. They would lose business if they were to try to do that. About half of our members have said that they're not able to, and they are having to at least temporarily absorb the impact of the incidence of the tariff itself.

I will add that our members have been broadly supportive of some of the government's moves to walk away from the trade discussions. Most of our members have said that they support the government's walking away. They do understand the desire to put in place some retaliatory tariffs, but I have to say that it is taking its toll. Many businesses—a majority of them, two-thirds—are suggesting that Canada needs to get back to the bargaining table as quickly as is reasonably possible. Almost 30% of small firms said they are worried their business may be permanently closed if this trade war were to last over the course of the next year, so the impact is quite significant on that front.

In terms of what the Canadian government should do or do differently, I will say that we have been incredibly disappointed with the response of assistance to small firms. Almost all of the Government of Canada programs right now have a minimum of $1 million in sales before you're able to participate. There are thousands and thousands of small firms that are deemed too small to be helped by Canada's support programs that are delivered by regional development authorities or even the BDC. I know the government is working to consider some programs for the future. Perhaps we may see something in the new budget, but at the moment, most small businesses in Canada are ineligible for any of the supports that are offered to their larger counterparts, and we feel that this is deeply unfair and, in fact, quite insulting to Canada's small business community.

I'll close it there.

[The Chair, Liberal, Ahmed Hussen]

Thank you very much.

I now invite Dr. Tombe to deliver his remarks, which are not to exceed five minutes.

Welcome.

[Trevor Tombe, Professor of Economics, University of Calgary, As an Individual]

Thank you, Mr. Chair and members of the committee, for the invitation.

In my opening remarks, I'm going to focus on the work that I've spent much of the past two years studying in terms of the economic implications of tariffs between Canada and the United States. I do want to say right up front that, of course, Canada's response involves many considerations: diplomatic, strategic, political and so many others. Economics is just one aspect, and reasonable people can weigh different factors differently. My aim is really just to try to explain some of the economic costs and trade-offs involved.

I'll offer three main observations. First, I think U.S. tariffs may be better understood as American domestic policy rather than as a bilateral dispute with Canada. Second, retaliation by Canada adds to Canadians' costs. Third, the effect of retaliation, particularly on U.S. policy, appears to be quite limited.

I'll start with a shock. First, it's, of course, enormous. I don't need to convince anyone of that. It is perhaps, and at moments last year was, the largest trade policy change in U.S. history—so, in 250-plus years. The average U.S. tariffs rose from about 2% in 2024 to over 30% in April 2025. Those “liberation day” tariffs did not last, but today we are at around an 11% average effective tariff levied by the United States. That's about five times the previous level.

These are broad. They affect nearly every country. I think this is a critically important point. Earlier this year, imports from China, for example, faced average rates near 30%, and Germany and Japan faced around 12% and 15% respectively. This is compared to about 8% for Canada today. The latest data from the U.S. International Trade Commission shows that 93 countries have higher average rates of tariffs applied to them than Canada. This may be less of a trade war with Canada than a fundamental change in how the United States runs its economy.

In theory, a tariff is equivalent to a domestic consumption tax plus a production subsidy of the same rate. I think that way of thinking about it is perhaps a bit more helpful in the current context. Had the U.S. simply adopted a broad-based consumption tax and a set of production subsidies, we would be viewing them very differently, and retaliation might never have come up.

That doesn't mean the costs to Canada's economy are small. They certainly hit some regions more than others. Ontario and Quebec firms, for example, face average rates roughly double the national average. Our economy might be about 2% smaller than it otherwise would have been, based on where we are relative to the Bank of Canada's projection before all of this began early last year. Now, a lot of that cost might be from uncertainty rather than the tariffs themselves, but even the PBO analysis from just a few days ago suggests that the tariffs might be contributing about 1.5% of a reduction to Canada's economy.

Let's turn to retaliation, my second point. These are taxes, and they're paid by Canadians. The round of retaliation that we levied in 2025 raised about $4 billion in federal revenue over the six months that they were in place for.

As for the latest round, beginning last month, I estimate that they may raise consumer prices by something in the order of about one-quarter of a percentage point and cost consumers about $100 million per week that they're in place. The burden is hardest on those least able to afford it. I estimate that households earning less than $30,000 may lose about half a per cent of their disposable income as a result of just the newly enacted retaliatory tariffs. That's triple the hit to those earning above $150,000.

Retaliation also raises business costs, as Dan mentioned. I estimate that machinery and equipment investment costs may be about 0.7% more expensive now as a result of the retaliation that weighs on investment and productivity.

Third—and I'll make this point quickly, as I'm getting to the end of the five minutes here—retaliation's main goal is to change U.S. behaviour. It is really difficult for a small country's tariffs to actually have meaningful economic costs on the target country—in this case, the United States. This is a challenge that all countries of Canada's size face. There are some things where we are large and where the tariff might be felt by domestic producers in the United States, but the opportunity for that is very, very limited.

I think our focus should really be on ensuring that economic strength and resilience are there, despite the challenges we face internationally. I'd be happy to talk about some of the potential options there in the questions.

If we think about what's going on now as just a change in U.S. domestic policy rather than as something uniquely targeted against Canada, then our response can focus more on domestic policy improvements rather than this dispute and fight back and forth with the United States.

Thank you. I look forward to your questions.

[The Chair, Liberal, Ahmed Hussen]

Thank you very much for your statements.

I'll open the floor to questions, beginning with MP Mantle.

You have six minutes.

[Jacob Mantle, Conservative, York—Durham, ON]

Thank you, Mr. Chair.

Thank you to our witnesses for appearing and providing their valuable testimony on this important topic.

My first questions will be for Mr. Tombe.

You've written that the purpose of retaliation, as you discussed in your opening, is to change another country's behaviour. In your writing, you cited Adam Smith, saying that tariffs are sensible only if they can get the repeal of the other country's tariffs on you; otherwise, you just injure yourself. Is there any evidence that Canada's retaliation has changed U.S. behaviour, or does it fail that Adam Smith test?

[Trevor Tombe]

There's no evidence that the retaliation we've enacted has changed U.S. behaviour. Certainly, in this latest round it has resulted in a slight increase in U.S. tariffs targeting Canada. We have avoided an ever-worsening tit-for-tat, thankfully, but it is just not the case that what we've enacted adds up to enough to really move the needle economically in any way that political decision-makers south of the border will respond to.

For some context, I estimate that our largest retaliation from last year added up to something on the order of about 0.1% of GDP in some of the most heavily impacted states. Canada faces something of a trilemma. You want to have retaliation that targets goods from politically important states, goods where we're a major buyer, and goods where, from our perspective, we can easily substitute into other things. Doing all three is quite difficult. I estimate that a package that ticks all those three boxes would be roughly one-tenth the size of the full dollar-for-dollar retaliation that some have proposed in this latest round.

[Jacob Mantle, Conservative, York—Durham, ON]

Thank you for that.

On the efficacy of these countertariffs on the United States, in some of your writings you estimated it at about 0.1% of economic activity on a monthly basis for most states. Has anything the government done changed that analysis, or is it still your conclusion that Canada's economic pressure on the U.S. is really too small to be effective?

[Trevor Tombe]

It is just arithmetic that Canada's retaliatory tariffs are very small from the perspective of U.S. GDP. On the amounts here, we're talking tenths of a per cent of GDP in even the most heavily affected states. These are well within the margin of error of our ability to calculate GDP in the first place. It's something that could not in any way be seen as meaningful economically.

Now, as I noted at the start of my remarks, there are other considerations as well that go beyond just economics. The extent to which retaliation can help facilitate effective public relations and marketing campaigns in the States is another conversation, but economically, it's not something that has a meaningful impact on overall U.S. economic activity.

[Jacob Mantle, Conservative, York—Durham, ON]

Thank you, Mr. Tombe.

You argued in your article on what you called the “retaliation trilemma”, that it's impossible to design countertariffs that simultaneously hurt U.S. producers, are politically well targeted, and minimize damage at home. I will note that this has been the government's talking point for all these countertariffs: We're going to minimize damage at home, because we'll source from third countries, and we'll target the U.S. in ways that hurt them.

Looking at those measures, which of those three, in your opinion, has been sacrificed? What's the cost?

[Trevor Tombe]

That's a good question. I'm not sure I can provide a quantitative answer to it.

What is fairly clear, when I look at the retaliatory package, is that they did not follow through on full dollar-for-dollar retaliation. Governments still refer to it as dollar-for-dollar retaliation when it is about 60¢ on the dollar. I think there was some internal recognition that going forward with a full package that matched what the U.S. enacted in August would just have additional costs and consequences on the Canadian economy.

Out of the three things, it was the overall size being scaled back a bit, to about 40% smaller than would have been the case had we actually done dollar for dollar, and it was the political targeting of this. That's something where I defined it as landing largely on swing states, where changing political outcomes matter most for U.S. Senate or presidential political calculations. That's where it's not so clear that the retaliation has impacts in politically sensitive areas over others.

[Jacob Mantle, Conservative, York—Durham, ON]

Thank you.

My last question for you, Mr. Tombe, in putting that all together—the limited ability to change behaviour and the clear costs to Canada—do you think the government was wise to impose countertariffs? Do you think we should repeal them now?

[Trevor Tombe]

I guess I won't answer that direct question, in that there are non-economic considerations here as well. There are costs on Canadians and on the Canadian economy from retaliation: half a per cent off disposable income for low-income Canadians, as an example, and increasing consumer prices across the board by about a quarter of a per cent overall just for consumers, not even for businesses. It's about $100 million per week of additional costs.

Those costs might be worth paying if one is making an argument that there are non-economic objectives that these tariffs achieve. I don't know what those might be, but there may very well be such objectives. I'd say that the economic case for retaliation is thin, and one has to look at non-economic considerations if that's the route one wants to go down.

[The Chair, Liberal, Ahmed Hussen]

Thank you very much.

Next, we go to MP Clark.

You have six minutes.

[Braedon Clark, Liberal, Sackville—Bedford—Preston, NS]

Thank you very much, Mr. Chair.

Thank you to our witnesses for being here and for starting early and being flexible in that regard.

Mr. Kelly, I want to direct a few questions to you, if I may. Part of my riding in Nova Scotia includes the Burnside Industrial Park, which is the largest industrial park in Atlantic Canada. The vast majority of those businesses there would be categorized as SMEs, for sure.

Over the last number of weeks, obviously, I've heard from more and more businesses that are affected by the ongoing tariff and trade war. I take your point, certainly, about the fact that we often hear in the headlines about the large enterprises. Of course, that makes sense, but there are thousands of other businesses that are impacted.

Your point about the threshold is an interesting one. I'm wondering, is it as simple as lowering that threshold? In your view and the view of your membership, what would be the most effective way to get relief dollars to small businesses that don't have the capacity or the resources to pivot or to move as easily as a much larger company?

[Dan Kelly]

Thank you so much for the question.

Yes, we have made some suggestions to government on what could happen.

Now, for your constituency, the good news is that ACOA is the only regional development authority that is not imposing the $1-million threshold on small firms.

For some reason, we've decided that for small and medium-sized firms in Atlantic Canada, it's suitable to provide small businesses with support, but for my hometown of Winnipeg, it's absolutely prohibited that a small firm with under $1 million in sales can have any kind of relief from the tariff impact. I find that ridiculous, and it's something that I've been urging Minister Joly to change and to change quickly.

Beyond that, though, the more effective way, in our opinion, to help small firms through this is to exempt the smallest companies from some of the impacts of the tariffs. What we have suggested is that the CRA be allowed to provide a direct rebate to small firms for a portion of the U.S. tariffs they are paying or a portion of the Canadian countertariffs they are paying.

We've suggested that perhaps $50,000 U.S. or $70,000 Canadian could be directly rebated. If you can show evidence that you've actually paid the tariffs, or if you've had to adjust your prices to accommodate the tariffs—for example, discounting to your U.S. customer—then you would get that money back, and that money could be paid for by the retaliatory tariff income. I recognize that this in some ways can defeat the purpose of the tariffs themselves and of the countertariffs themselves. At the same time, exempting some of the smallest companies from the weight of it, the full weight of it, I think would be an appropriate measure.

As an example, look, the challenge for a lot of small companies is that they've done what they can to diversify. A third of our members are starting to trade more within Canada, helped by the lowering of interprovincial trade barriers. That's a good thing. A third of our members have been diversifying their trade—either suppliers or customers—in other countries outside of the United States. That's a good thing, too, and I'm hoping those relationships last beyond the current trade war, but it is impractical—in fact, I think unwise—for every Canadian business to be avoiding sales in the United States or buying from the United States. That's why we have suggested a more direct measure to do this.

[Braedon Clark, Liberal, Sackville—Bedford—Preston, NS]

Thank you, Mr. Kelly. I appreciate that.

You talked about the timing of things in your opening statement. Obviously, this is an incredibly volatile and unstable situation, so timing is a dangerous thing to speculate on in any case. Do you have any sense, from your membership, on the smaller and medium-sized enterprises...? I think you mentioned in your opening statement....

What do you think? Are we looking at six months to a year where some of these businesses...? If we are able to provide some of those supports that you've mentioned, is that the time frame, in your mind, that we're working against?

[Dan Kelly]

We've asked that question a couple of different ways.

The number of businesses that would be able to withstand, say, three months of this latest round of tariffs, which came into effect in August, and how many may be able to withstand a year of them.... As I said in my testimony, about 30% of our members said they are at significant risk of failure if the trade war continues on in its current form for a year without some degree of help. That was split into about 15% of our members—they're small business owners—who said they were at high risk of failure and 15% who said they were at modest risk of business failure as a result.

On the countertariff side, one of the challenges is that.... I understand it is very difficult, as I think Trevor described, to try to target these things absolutely properly, but there are some goods that we bring in from the United States, which are on the list of Canadian retaliatory tariffs, for which there are really no Canadian suppliers or even, in some cases, international suppliers. We're supposed to have a tariff remission process to address that, but our tariff remission process is a joke. Right now, I have small business owners who have had active files sitting in Ottawa for a year, without a single piece of any evidence to suggest that a government bureaucrat has even looked at them yet. My view is that we have two bureaucrats and a box of pencils as the tools to try to address our tariff remission process.

It is shameful that a year and a half into this trade war, that's where we are.

[The Chair, Liberal, Ahmed Hussen]

Thank you very much.

We will go next to MP Brunelle-Duceppe.

Mr. Brunelle‑Duceppe, you have the floor for six minutes.

[Alexis Brunelle-Duceppe, Bloc, Lac-Saint-Jean, QC]

Thank you, Mr. Chair.

Good morning to our witnesses.

Mr. Tombe, I do not wish to alter your statement, so please correct me if necessary. You recently suggested in a podcast that Canada simply does not have sufficient economic clout to influence the behaviour of the United States. Given our dependence on the U.S. market, what economic levers does Canada actually have at its disposal to counter trade pressures from Washington without penalizing its own businesses?

[Trevor Tombe]

That's a great question.

The main way in which tariffs can exert economic costs on a target country is by lowering the price that the exporters sell at. When you're a large buyer of something, if you put a tariff on it, think about that as a reduction in demand for that product. If demand falls, prices tend to fall as well. That's the mechanism that shifts the incidence, we say, of the tariff onto the exporters in the other country.

Given Canada's size relative to the United States, the change in demand due to a Canadian tariff, from the perspective of a U.S. producer, is so small in the overwhelming majority of cases that the price of the good we're targeting isn't going to fall. That means the incidence of the tariff is on just the Canadian buyers, whether they're direct consumers or businesses purchasing inputs and so on.

What else can Canada do to pressure the United States to change its behaviour? That involves expertise beyond economics. The economic tools we have are incredibly limited. This then turns it into a conversation of public relations, marketing, advertising, lobbying and diplomatic exchanges—things I won't comment on—but the economic tools at our disposal to exert pressure on the U.S. are extremely limited.

[Alexis Brunelle-Duceppe, Bloc, Lac-Saint-Jean, QC]

So, what you're telling us is that, at this stage, it's much more political than economic. You are, after all, a professor of economics, if I'm not mistaken. So you are aware of what Canadian counter-tariff measures entail and the revenue the federal government generates from them. Inevitably, when counter-tariff measures are imposed, they generate revenue.

Normally, in a rational world, this money would go into the federal government's coffers. Let's put aside the relationship between Canada and the United States. If these were two completely different countries and countervailing measures were in place, shouldn't this money be used to help the businesses affected by this trade war? Wouldn't that be the whole point of generating revenue?

You can answer yes or no, or you can tell us more, of course.

[Trevor Tombe]

That's a great question.

How the revenue is used is a separate question from whether tariffs should or shouldn't be levied in the first place. If one's goal is to raise revenue, there are more economically efficient ways to do so. Tariffs do raise revenue, but at a greater cost to the economy per dollar raised of government revenue. We can provide support to affected businesses, workers and so on using other fiscal tools. Tariffs are not necessary in order to fund that kind of support.

[Alexis Brunelle-Duceppe, Bloc, Lac-Saint-Jean, QC]

I understand, but there is still a great deal of revenue generated by these tariff countermeasures. In a normal world, shouldn't this revenue be channelled to certain sectors? Shouldn't the government be helping the economic sectors affected by a tariff war, rather than subsidizing, for example, industries or economic sectors that are not affected by the tariff war?

Take, for example, the oil and gas sector in Canada. At present, it is the sector most heavily subsidized by the federal government with public money, even though it is one of the few sectors not currently subject to customs duties.

I can take the example of forestry in Quebec and the rest of Canada, which is, incidentally, the largest employer in Canada compared to the energy sector. It accounts for 200,000 jobs in Canada, whilst the energy sector accounts for 192,000 jobs. In short, forestry will, I believe, receive $10 billion over 10 years under a plan that has not even been unveiled yet, whereas, for example, the oil and gas sector received $14 billion in public funds last year in the form of tax credits and grants.

Now, one may or may not have one's own views on climate change; that is beside the point. My question relates strictly to the fiscal aspect. Shouldn't we instead be using the money from tariff countermeasures to help industries affected by the trade war, rather than sending money to industries that are not affected?

[Trevor Tombe]

It's best, in my opinion, not to think about any source of government revenue as earmarked for particular and specific purposes. Tariff revenues flow into the general revenue fund like every other source of major government taxation revenues. What the government spends money on and in which sectors and in which regions, through different programs, isn't related to any of the revenue measures brought in.

We should think about whether or not we're spending appropriately or enough in different areas or, as you alluded to, perhaps spending too much in other areas, and talk directly about that. The revenues from tariffs aren't in any way earmarked for anything.