The Receipt

Manitoba Premier Wab Kinew said it plainly on August 22: “He’s got two more years left in office. We should be prepared to duke it out for two years. And then hopefully sanity will return to America.” [1] Ontario Premier Doug Ford put it another way the same weekend: Canadians are willing to “endure economic pain rather than give in to U.S. pressure.” [2] Abacus Data polling from July found 69% of Canadians want Ottawa to hold firm even if negotiations take longer. [3] The willingness to endure a prolonged confrontation is broadly shared. This article examines an economic assumption embedded in that strategy: that the damage being absorbed now will reverse when the pressure lifts.

Some of it will. Bank of Canada research published in 2026 found that retail price increases from Canada’s own retaliatory tariffs reversed within months of tariff removal. [4] Prices can snap back. But the institutional record draws a distinction between the kind of damage that recovers and the kind that does not. Supply chains that relocate during trade disruptions can outlast the shock that caused them. Businesses that file for insolvency are not paused; their productive capacity is dissolved. Investment deferred under prolonged uncertainty is not stored. The Bank of Canada’s July 2026 Monetary Policy Report projects that growth will recover, rising from 0.7% in 2026 to 1.8% in 2027 and 2028. [5] But the Bank also projects that the economy will never reach the level it otherwise would have. Growth can resume without restoring everything that was lost while the disruption lasted.

This article is a risk assessment, not a projection. It does not forecast GDP or predict a recession. It examines what named institutions say about the nature of the damage being sustained, and whether that nature is consistent with the assumption that the costs will fully reverse.

The Section 338 tariffs took effect on August 22, 2026, imposing 50% duties on roughly US$20 billion in Canadian goods. [6] They arrived after approximately 18 months of recurring tariff disruption under different authorities, rates, and product coverage, with pauses, modifications, and legal reversals along the way. Canada’s premiers and prime minister have framed the confrontation as one the country can endure. The question this article examines is not whether they are right to resist. It is whether the economic model embedded in that resistance accounts for the kind of damage the institutional record describes.

What “Short-Term Pain” Assumes

The phrase “short-term pain” carries an implicit model: damage accumulates while tariffs are in place, stops when they are removed, and reverses over time. Workers are rehired. Investment resumes. Supply chains reconnect. The economy returns to its pre-disruption trajectory.

The institutional and empirical record describes something more complicated. Some damage does reverse. Some does not. And the two kinds are difficult to distinguish in advance.

Supply Chains That Move Don’t Easily Return

The clearest precedent is the U.S.-China tariff experience. When the first Trump administration imposed tariffs on Chinese imports in 2018, firms initially waited to see whether the tariffs would last. When the Biden administration maintained those tariffs and expanded them with new duties on electric vehicles, batteries, and semiconductors, [7] the calculus changed. As researchers Laura Alfaro and Davin Chor documented in an IMF-published study, once firms recognized that the tariffs would persist, they “stopped taking a ‘wait and see’ approach and instead started incurring the sunk costs of reorganising and relocating their cross-border supply chains.” [8] China’s share of U.S. imports fell from roughly 22% in 2017 to 9% by late 2025. [8]

Those supply chains have not returned. Dell and Apple established laptop assembly operations in Vietnam. Sony, Nintendo, and Microsoft expanded console manufacturing there. [9] The relevant tariffs remained in place, so this is not a post-removal experiment. It is evidence that once firms incur the sunk costs of reconfiguring a supply chain, the new configuration tends to persist because the capital has already been deployed.

The same dynamic is appearing in Canadian data. A May 2026 KPMG survey of 275 Canadian manufacturers found that 29% had already moved some or all production to the United States, with an additional 13% planning or considering a move. [10] Thomson Reuters Institute noted in April 2026 that manufacturers who had shifted production during the tariff period “may maintain those footprints even if duties are lifted, due to sunk costs or new regional advantages.” [11]

The strongest counter-evidence is the Australian barley case. China imposed an 80% tariff on Australian barley in 2020 and removed it in August 2023. By 2024, Australian barley exports to China had recovered to roughly A$1.22 billion, close to pre-tariff levels. [12] That recovery deserves its full weight. But barley required far less destination-specific fixed investment than an automotive or electronics production line. The product is fungible, the buyer simply resumed purchasing, and no factory had been relocated. Even so, China diversified during the tariff period: France now accounts for 46% of China’s barley imports, up from a negligible share before the tariffs. [13] Even a commodity market did not fully snap back to its original configuration.

Insolvencies Are Filed, Not Un-Filed

In the first quarter of 2026, 37,121 Canadians filed for consumer insolvency, the highest quarterly volume since 2009. [14] In the second quarter, that number rose to 37,523. [15] Over the twelve months ending June 2026, total insolvency filings reached 150,505, within 0.4% of the all-time record set in 2010. [15] These consumer figures are a measure of household financial stress, not of lost productive capacity directly. But business insolvencies tell a related story. In Q1 2026, 1,232 businesses filed for insolvency, up 9.8% from the previous quarter, which CAIRP attributed in part to “softer demand, higher fuel and input costs, still-elevated borrowing costs, and renewed uncertainty around trade, tariffs, and supply chains.” [14] Business insolvency filings remained 27.6% above the pre-pandemic quarterly average. [14]

Not every business insolvency is a liquidation. Canada’s insolvency system includes proposals that allow businesses to restructure debt and continue operating. But when a business does liquidate, the loss is structural: its assets are sold, its employees are released, its supplier relationships are severed. A new business may eventually fill the gap, but the timeline is measured in years, and the firm-specific capital, organizational knowledge, and supplier networks that were dissolved do not reconstitute.

Investment Deferred, Not Recovered

The same KPMG survey found that 57% of Canadian manufacturers had paused, reduced, or cancelled capital expenditure. [10] The Business Council of Canada reported in July 2026 that business capital spending had reached a two-year low. [16] Canadian businesses invest 55 cents per worker for every dollar invested by their U.S. counterparts, according to the Canadian Chamber of Commerce. [17]

The strongest case against this reading is the pent-up-demand thesis: that trade disruptions create compressed springs, not broken ones, and that removing tariffs would trigger a surge of investment that closes the gap rapidly. This argument has institutional support. The Bank of Canada’s own de-escalation scenario projects that tariff removal would strengthen exports and domestic demand, with improved confidence generating an investment rebound. [5] That rebound is real. The question is what it restores.

Investment growth can recover sharply without recovering the investment that was never made during the disruption. A factory that would have been built in 2025 but was deferred to 2028 represents three years of lost productive output from that facility. The investment eventually arrives; the output from the intervening years does not. A broader economics literature on hysteresis finds that sufficiently persistent demand shocks can leave lasting effects on employment and investment, transmitting through long-term unemployment and declining labour force participation. [18]

Canadian-specific evidence complicates the picture in an important way. Researchers Brian Kovak and Peter Morrow tracked Canadian workers displaced by the 1989 Canada-U.S. Free Trade Agreement using Statistics Canada administrative data over 16 years. They found that while Canadian tariff cuts led to short-run layoffs and earnings losses, workers “quickly recovered lost earnings by transitioning to other firms, industries, and sectors.” [19] Cumulative earnings and total years worked were largely unaffected over the long run. That finding is important. It is also specific to its context: CUSFTA was reciprocal trade liberalization that simultaneously opened new U.S. export markets for Canadian firms, creating sectors for displaced workers to move into. The current shock is asymmetric. Canadian workers facing tariff-driven plant closures are not simultaneously gaining access to expanding export sectors. Whether that difference changes the outcome is an open question the institutional record has not yet answered.

The Capacity Ceiling

The Bank of Canada’s July 2026 Monetary Policy Report projects GDP growth recovering to 1.8% in both 2027 and 2028, above the rate at which the economy’s productive capacity is expanding. [5] The Bank also noted that “Canada’s productive capacity is anticipated to grow slowly in 2026, held back by tariff-related structural adjustments and subdued population growth.” [20] In its October 2025 rate decision, the Bank described the underlying mechanism as “structural damage from ongoing trade disruptions.” [21]

The distinction that matters here is between the growth rate and the level. A period of below-potential growth permanently lowers the level of the economy relative to where it would have been, even after the growth rate itself recovers. If the economy would have reached 100 without the tariff shock but reaches only 97 because of it, subsequent growth at 1.8% compounds from 97, not from 100. The economy grows, but from a lower base. The gap does not close on its own.

This is the mechanism that makes the “wait it out” framing incomplete. The strategy does not need the economy to stop growing in order to leave a permanent cost. It only needs the disruption to persist long enough to lower the level from which recovery begins. The Bank’s own projections describe exactly that: growth recovers, the economy does not fully return to the path it was on. The July 2026 forecast was issued before the Section 338 tariffs took effect on August 22 and does not incorporate the 50% duties now in place. [6]

The Tariffs May Not End on Schedule

The “wait it out” strategy carries a second embedded assumption: that the tariffs disappear when the Trump presidency ends on January 20, 2029, approximately 29 months from now.

Section 338 of the Tariff Act of 1930 contains no automatic sunset, no periodic review requirement, and no congressional reauthorization mechanism. As the law firm BLG noted in its July 2026 analysis, the proclamations “advance an interpretation that the Tariff Act allows Section 338 tariffs to continue indefinitely unless the president reduces, modifies or terminates them.” [6] Morrison Foerster confirmed that Section 338 “does not on its face require an investigation, public notice, a comment period, a hearing, or formal agency findings.” [22] Ending or modifying the duties requires affirmative executive action.

The recent record does not support assuming that a change of administration automatically ends inherited tariffs. The Section 232 tariffs on steel and aluminum, imposed in 2018, remain in effect in 2026 across three successive administrations. The Section 301 tariffs on China, also imposed in 2018, were maintained by the Biden administration and expanded with new duties in 2024. [7] [23] The Supreme Court’s February 2026 decision in Learning Resources, Inc. v. Trump struck down tariffs imposed under IEEPA but did not affect Section 338, which is a distinct authority under Title 19. [24] A future president can revoke the Section 338 tariffs. The assumption that one will is an assumption, not a precedent.

What Would Change This Assessment

This assessment rests on the finding that some trade-war damage persists after the initiating shock ends, and that growth recovery does not automatically restore the economic output, investment, and productive capacity lost during the disruption. The following conditions, if met, would weaken that finding:

  • If a substantial share of Canadian manufacturers who relocated production to the United States during the tariff period return production to Canada within 24 months of tariff removal, as documented by a follow-up survey, the supply-chain persistence finding weakens. The relevant baseline is the 29% of firms in the KPMG survey that had actually moved production, not the broader 42% that includes firms still considering a move.
  • If quarterly business insolvency filings return to pre-2025 levels (approximately 1,000 per quarter) within four quarters of tariff removal, the business-capacity-destruction channel is weaker than this article claims.
  • If business capital investment returns to the pre-tariff trend level within six quarters of tariff removal, the investment-deferral finding weakens.
  • If the Bank of Canada projects that the level of potential output will converge with its pre-tariff (January 2025) counterfactual path, the permanent-level-loss finding weakens. The test is the level, not the growth rate: growth can recover without closing the gap.

These are post-removal tests. Until removal occurs, the assessment remains conditional.