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The Bottom Line:

A plunge in Q2 Canadian export volumes is on track to substantially subtract from Canadian GDP in Q2 following a pre-tariff surge in Q1 when U.S. importers rushed to front-run tariffs. But there was further (encouraging) evidence in June that an exemption for trade compliant with the USMCA/CUSMA free trade agreement is backstopping duty free access to the U.S. market for most Canadian exports. 

Sector specific tariffs on U.S. imports from Canada of products like steel and aluminum and the non-U.S. content of finished motor vehicles are raising costs significantly for U.S. buyers, but the U.S. census bureau reported 92% of Canadian exports to the U.S. crossed the border duty free in June — up slightly from 91% in May and 89% in April.

The average effective U.S. tariff rate on imports from Canada remained one of the lowest among U.S. trading partners at 2.4% — well-below the 8.9% average U.S. rate on all imports in June.  That effective tariff rate on imports from Canada will rise with an increase in the rate on products not compliant with the USMCA/CUSMA to 35% in August (from 25% in June) but that increase applies to a relatively small share (we estimate ~6%) of exports to the U.S. that are not USMCA compliant.

We continue to expect that current rules, if maintained as currently in place, would leave Canada with the lowest tariff rate of any major U.S. trade partner — putting Canadian exporters in a stronger relative  position to compete for U.S. import market share than other countries.  The concern remains, though, that US tariff hikes have been so large —and uncertainty so high surrounding their announcements—that US economic growth will slow with negative implications for close U.S. trade partners like Canada. 

The total U.S. effective tariff rate on imports from all countries continued to rise in June, hitting its highest level since the 1940s, and there is early evidence that U.S. labour markets are softening as a result, particularly in the U.S. industrial sector where ties with the Canadian economy are extremely close.

The June details:

• The Canadian trade deficit widened to $5.9 billion in June from a $5.5 billion shortfall in May, but reportedly entirely due to a large “one time high-value” equipment import from the United States to Newfoundland’s offshore oil production sector. 

• Excluding a $2.1 billion jump in the equipment import component that contained that product (logging, construction, mining, and oil and gas field equipment), imports of goods would have declined by another 1.8% in June, and the trade deficit would have narrowed to $3.8 billion overall. 

• That large equipment purchase should not impact overall GDP estimates — the import increase will mechanically subtract from GDP, but should be offset by higher business equipment spending.  

• Canadian exports rose 0.9% in June, but largely due to higher oil prices.  Export volumes declined 0.6% following a 2.5% increase in May that only partially retraced an 8.6% plunge in April.

• Exports to the United States rose 3.1% in June but were still  down 12.5% from a year ago.

• In Q2 as a whole, Canadian export volumes plunged a whopping 31.4% at an annualized rate. Imports fell by a smaller 5.7%, leaving net merchandise trade on track to subtract substantially (potentially 6%+) from Canadian Q2 GDP growth.)

• Preliminary total GDP estimates are suggesting that GDP overall was unchanged — softer than the 2.2% increase in Q1 but avoiding an outright decline offset to net trade weakness from a build in inventories and relatively resilient consumer spending.

About the Author

Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.