Canada escaped Trump’s tariff announcement yesterday unscathed, as products that are eligible under the USMCA agreement will remain tariff-free. We expect that this exemption will cover over 80% of Canadian trade, and the tariff rate on Canadian exports to the US would only rise by 5.5% under Trump’s proposals.
Our estimates suggest that these tariffs will lower Canadian GDP by 1.0% and that prices will rise by 0.3% under our expectations for moderate retaliation. While these are clearly unwelcome headwinds to the Canadian economy, they are much less severe than the 2.5% hit to GDP and 0.6% boost to prices we estimate had the US followed through with earlier plans to deliver 25% tariffs on Canadian exports.
These tariff headwinds were mostly already incorporated into our baseline economic forecasts, but additional growth drivers have emerged in recent weeks. On the negative side, the recent downgrade in the US growth outlook will likely result in negative spillovers to Canada, resulting in a 1⁄2% drag on GDP. On the positive side, fiscal policy is likely to turn modestly more accommodative due to personal tax cuts totalling 0.2-0.7% of GDP after the election, as well as increased support for businesses and workers affected by tariffs. In addition, boycotts of US products will likely boost GDP by 0.4% as Canadian consumers shift toward domestic goods and forego US travel.
We see recent data and news as somewhat negative on net and are therefore lowering our GDP growth forecast to 1.3% on a Q4/Q4 basis (vs. 1.6% previously) and raising our CPI forecast to 2.7% in 2025 (vs. 2.5%). We still expect that the BoC will remain on hold in April, but now expect that the BoC will deliver 25bp cuts in June and July for a 2.25% terminal rate (vs. previous forecast for a final 25bp cut to a 2.50% terminal rate in June).
The Trump administration has sharply increased US tariff rates, which are scheduled to take effect over the coming week. Under the Trump administration’s “reciprocal tariff” policy the overall US effective tariff rate would rise to 18.3%, although the exemption of specific products subject to section 232 investigations would reduce the impact to a 12.6pp increase in the effective tariff rate.
Canada (and Mexico) came away from Trump’s April 2nd announcement relatively and surprisingly unscathed. The executive order continues to exempt USMCA-compliant imports from the 25% tariff on Canada and Mexico and levied no incremental tariffs. The order states that if the exemption ends in the future, USMCA-compliant goods and energy products would receive duty-free treatment while non-compliant products would face a tariff rate of 12%, excluding energy and potash which would be duty-free. This 12% rate might signal the upper bound for tariff rates for Canada and Mexico.
We expect that the USMCA exemption will cover over 80% of Canadian trade, and the tariff rate on Canadian exports to the US would only rise by 5.5% under Trump’s proposals. Updating our earlier analysis suggests that these tariffs would lower Canadian GDP growth by around 1% and raise prices by around +0.3%. These impacts are much smaller than the almost 2.5% GDP hit and 0.6% uplift to prices (assuming Canada’s previously announced retaliation plans) that we estimate would have resulted from a 25% tariff.
