Even more inflation and a general depreciation of the Canadian market. If Canada increases tariffs on US imports, Canadian companies will have to borrow more to buy what they need to produce, therefore increasing the money supply and driving Canadian inflation higher. The vast majority of the borrowing will be directed to buying supplies not increasing salaries.
Tariffs on Canadian products in the US will likely lower the demand for them. Which means Canada will have a surplus of products that they might not be able to sell. The US is after all the number one market for Canadian products and for some companies the only one. This in terms will lead to a lowering of production which coupled with increased borrowing will likely increase inflation even higher.
So why not sell in Canada? Canada has a very high GDP / Capita but the size of it's market is not comparable to the US. Canada has also accumulated a high number of regulations that prevent economic growth and turn one of Canada's biggest advantage (its size) into one of it's biggest disadvantages. Canada is the second biggest country on earth, a fact that comes with a unique set of economic challenges, chief amongst them is the transport of goods. Canadian economy mostly relies on trucks to ship good from A Mare Usque Ad Mare. Canadian trucks are subjected to different laws in different Provinces. Some cannot event drive at night. In the second biggest country on earth it means a huge increase in shipping time and therefore cost needed to ship goods. Canadian energy costs are high, due to carbon taxes and various laws and regulations that prevent the growth of its oil industry. Canadian provinces also have specific taxation laws that effectively act as tariffs within the country, driving the competitiveness of the inner Canadian market lower. Canada taxes on employment and consumption are also general higher, driving cost of labor and therefore the cost of everything higher.
All this means that until now, it was cheaper to sell to the US than within Canada. For some, it was even cheaper to drive to the border and send a package with USPS than to send from Canada using Post Canada.
Why not Europe then? Europe is far, which means higher logistical and shipping costs. Europe is also extremely regulated, which means that Canadian companies would have to undergo massive restructurations to make their products fit the European market from a regulatory perspective. Canadian market is so intertwined with the US market that a lot of what it produces is in inches and feet. Not what Europeans are looking for. Europe is also suffering from a serious inflation meaning that their capacity to buy Canadian surplus is not that high. Europe is not an homogeneous market. Selling in Europe means dealing with many languages and tax regulations like VAT that are specific to each country. This drives the cost of compliance even higher.
In short, If the tariffs war lasts, Canadian economy will produce surplus that it will not be able to sell, leading to a downsizing of the economy, and Canadian companies will have to increase their borrowing to maintain production. These will lead to higher inflation in Canada that will be accelerated by existing consumption taxes. This in turn will lead to an increase in salaries, therefore of borrowing and an acceleration of inflation due to existing labor taxes, which will lead to an increase of unemployment. This is the road to a Canadian recession that could lead to a massive defaulting on debt in Canada (especially in the housing market) and a general divestment from the Canadian economy.
The only viable option for Canada to soften the blow is to increase the competitiveness of its inner market: lower taxes and lower government spending (to reduce inflation), remove regulations (starting with the ones hindering inter-provincial economy), lower energy costs.
Edit: Canada just cut interest rates to 2.75% increasing money supply (link bellow).
