Canada: Tariffs reshape outlook – RBC

Royal Bank of Canada (RBC) analyzes new Section 338 U.S. tariffs on Canadian exports, noting a 50% rate on goods representing about 5% of Canada’s exports to the United States. The bank argues the measures are not large enough to derail Canada’s economic growth, but warns they significantly impact sectors like plastics, electrical machinery and wood products and add uncertainty to broader CUSMA trade relations.

New U.S. tariffs and Canadian response

"As we argued a month ago when the tariffs were initially announced, the size of the tariffs is likely not large enough to derail Canada’s economic growth backdrop."

"Still, the measures mark a re-intensification of U.S. tariff threats/measures, and concentrated specifically on Canada."

"Plastic products, electrical machinery, furniture and wood product sectors are among the most significantly impacted by the new measures – and regionally that means a higher concentration of economic impact in Quebec, BC, and Ontario."

"Because the tariff rate is so high and applies only to Canada, purchases of these products from Canada would be prohibitively expensive."

"But there is likely more potential for trade flows to reorient within North America to avoid increased tariff costs with these measures than some of the other sector specific tariffs imposed to-date."

"We do not expect the broader macroeconomic impact of these new tariffs to be enough to push the Bank of Canada to seriously consider pivoting to interest rate cuts."

"Tariff economic growth headwinds are still relatively narrowly based in a smaller number of highly impacted industries and fiscal (government tax and spending) policy is still better suited to provide targeted relief than blanket changes in interest rates from the central bank – and there are reports that fiscal supports will follow the imposition of this latest tariff round."

"Still, the intensification of trade uncertainty and recent moderation in underlying (excluding energy products) inflation trends also has increased the likelihood that the BoC will not hike interest rates this year."