Canada must invest significantly in trade infrastructure to shield its economy from the mounting costs of the U.S. trade war and help offset long-term damage to growth, Scotiabank says in a new report that calls for a strategic mix of fiscal stimulus and public investment.

Scotiabank Senior Vice-President and Chief Economist Jean-François Perrault warns that rising U.S. tariffs — assumed at an effective 10% rate on all American imports — are taking a toll not only on the U.S. economy but also causing direct and indirect harm to Canada, which faces a 4% effective tariff on its total exports. The dual impact is slowing Canada’s growth and threatening long-term productivity.

“Increased expenditures on public infrastructure should be unchanged notwithstanding what looms ahead for global trade,” Perrault writes in Canadian Fiscal Policy and Infrastructure Spending: Navigating the Tariff Troubled Waters? “It would benefit Canada’s economic potential and productivity, and Canadians more generally.”

Perrault estimates that a discretionary fiscal support package equivalent to 1.25% of GDP at its peak would be necessary to “largely offset” the drag from tariffs — about 1.6 times larger than what’s assumed in the bank’s latest outlook.

Targeted, transformational

The recommended fiscal response has two key pillars: temporary income support for households and a permanent boost to public investment, primarily in infrastructure. The aim, according to Perrault, is threefold: provide short-term support; mitigate long-term damage; and avoid excessive inflation.

The report warns of the dangers of repeating the policy mistakes of the post-pandemic era, where inflation surged after governments were slow to wind down emergency support. “If it becomes evident that inflation is on a worse track than modelled in our scenario, it would be critically important for governments to roll back these support packages expeditiously,” Perrault says.

The proposed package would not push inflation beyond the Bank of Canada’s 1–3% target range, nor force an increase in the current 2.75% policy interest rate. Inflation under the proposed plan would remain “near the mid-point” of the target range, and the policy rate is still expected to begin declining in early 2026.

As for public finances, the federal deficit would rise under the plan — peaking at $96 billion in 2026, or 2.9% of GDP — but still remain below levels seen during the 2008–09 Great Recession. “We believe that the magnitude of these deficits would be manageable” when assessed against the benefits this fiscal support package would provide, the report notes.

Infrastructure key to diversifying exports

Infrastructure investment is especially critical now, not just to stimulate the economy but to reorient Canada’s trade relationships away from the U.S., Perrault writes. Raising expenditures in public infrastructure “will raise the return on private investment projects,” he says. “It would also help to improve and expand the infrastructure stock, much needed in Canada, and help redirect a larger share of Canada’s exports to non-U.S. markets.”

Scotiabank models show that this infrastructure push would increase private investment in the long run, bolstering GDP by approximately 0.6% permanently and reducing vulnerability to external shocks.