In the early months of the Trump trade war, Canada appeared to be a prime target. After months of on-again, off-again tariffs, Canada has managed to negotiate exemptions and shown economic promise.
A new report from RBC’s chief economist Frances Donald, and associate chief economist Nathan Janzen, shows that, on average, the US tariffs against Canada are the lowest across the US’s major trade partner.
“While Canada’s economic path forward remains challenging, it appears considerably less treacherous than it did just a few months ago — a narrative that has yet to permeate the Canadian psyche,” they wrote.
RBC found that that current trade rules allow for 86% of the products Canadian businesses shipped to the U.S. last year to remain duty-free.
In addition, U.S. Census Bureau data from this April showed that nearly 90% of Canadian exports to the U.S. remained duty-free over the month.
“The average effective tariff on U.S. imports from Canada was 2.3% — up significantly from essentially zero in January — but the lowest of any major U.S. trade partner,” the authors wrote.
According to CBC, Canada appears to be the “safest” port in a global storm — until the unpredictable tides turn.
Feeling the effects
While this news is positive, it doesn’t take away from the economic damage the trade war has caused in Canada.
Last Friday, Statistics Canada’s released data showing that manufacturing sales saw the biggest drop-off in years.
“Total manufacturing sales declined 2.8% to $69.6 billion in April, the largest month-over-month decrease since October 2023 and the lowest level since January 2022,” it reads.
On top of that, the unemployment rate is the highest it’s been since 2016 at 7% (outside of the COVID-19 pandemic).
Manufacturing declines and joblessness intersect the most in trade-dependent areas, like southwestern Ontario. Despite this, the RBC team commends the Canadian economy for holding steady so far.
Donald and Janzen state that consumer sentiment surveys show confidence plummeted in March when the trade war started — “But actual spending data has not matched that scale of weakness.”
A double guarded front
Canada’s fiscal and monetary policy have helped uphold the economy during the trade war turbulence.
Fiscal policy refers to government spending where as monetary policy to the Bank of Canada’s set interest rates.
In 2024, the BoC cut rates with speed and intention. According to CBC, its key overnight lending rate dropped down 225 basis points from 5% to 2.75%.
BoC Governor Tiff Macklem has kept rates locked in place for three straight meetings and has expressed the need for more data before making any changes.
“We think the central bank is now at the end of its cutting cycle and do not expect further reductions. But, that is contingent on the economic growth backdrop and labour markets stabilizing,” wrote Donald and Janzen.
Canada needs growth
From a fiscal front, Donald and Janzen acknowledge that the federal government has posted high deficits in the last few years.
The federal government deficit increased by $0.5 billion from the fourth quarter of 2023 to $8.9 billion in the fourth quarter of 2024, while the total deficit of provincial, territorial, and local governments increased by $10.0 billion to $11.3 billion.
However, relative debt sits at the lowest across the developed world. Donald and Janzen believe that exploring Canada’s fiscal capacity could catalyze much needed economic growth and action.
“Action on interprovincial trade barriers could pay long-run dividends helping to support investment and productivity growth.”
They also assert that growth could be triggered by tax policy changes, loan programs and the recently announced changes to defence spending.
How do the tariffs benefit Canada?
The RBC report outlines how the trade shock we have endured has forced countries around the world to reconsider depending on the US.
“Canada’s resources — agriculture, energy, and critical minerals — are increasingly well positioned to support the needs of the global economy, particularly as it seeks to expand AI/data and defence spending,” wrote Donald and Janzen.
It’s a shift that “represents a moment for Canada to invest in itself and fulfil this need.”
Donald and Janzen’s RBC report doesn’t minimize or dismiss the obstacles Canada must overcome or the exhausting uncertainty hiding around every corner.
However, it is a refreshing take on where Canada stands.
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