For Canada, the absence of new tariff announcements on Wednesday is a small consolation prize as the U.S. imposed sweeping tariffs on most countries—ranging from at least 10 per cent to just below 50 per cent.
This puts the effective tariff rates from the U.S. at 23 per cent, higher than the average of 20 per cent under the Smoot-Hawley Tariff Act from the era of the Great Depression a century ago.
Given the lack of new U.S. tariffs on Canadian exports and Canada’s underlying inflationary pressures, the Bank of Canada will likely hold the policy rate at its next meeting in April.
Businesses could consider working to move more of their goods to be compliant with the Canada-United States-Mexico Agreement (CUSMA) to avoid tariffs, as well as expanding in markets within Canada and in other countries such as those in the European Union.
What does this mean for Canada?
Of course, Canada is not out of the woods by any means. Previously announced U.S. tariffs still stand, including a 25 per cent tariff on goods not currently covered by CUSMA and 10 per cent on energy and potash. Canadian businesses are also subject to 25 per cent U.S. tariffs on autos and the 25 per cent duty Washington imposed on steel and aluminum imports from all countries.
Since auto tariffs are only applied to non-U.S. made components, coupled with the lower currency exchange rate, the effective tariff rates on autos for Canadian manufacturers would be meaningfully lower than 25 per cent. While car prices will still rise and Canadian auto manufacturers will be hurt, this tariff will not shut down the industry.
If recent executive orders citing border security are withdrawn, Canada and Mexico will face 12 per cent tariffs on goods not covered under CUSMA, which is on par with most of the world.
Canada’s response on Thursday was targeted, as Prime Minister Mark Carney announced a 25 per cent tariff on auto imports from the U.S. that don’t comply with CUSMA. This exactly mirrors the U.S. tariffs imposed on auto imports from all countries.
Any additional Canadian measures will likely be less forceful than the previously planned retaliatory tariffs of $125 billion now that Canada is at a relatively competitive advantage compared to other U.S. trade partners.
At the moment, all tariffs are only on merchandise, while the U.S. has a trade surplus on services with many countries.
The Canadian dollar, meanwhile, climbed to the highest since early December against the U.S. dollar as the U.S. dollar lost value against 15 out of 16 currencies in the world.
Altering global trade patterns
The broad-based tariffs on most countries will fundamentally alter global trade patterns and incentivize countries around the world to coordinate.
Countries will likely deepen existing trade relations and form new trade alliances to counter the economic damage that could come in the wake of U.S. measures. Once tariffs are cemented, they could remain in place for years.
Already, Canada is working on increasing trade with the EU, expanding upon the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). Canada and Mexico are also having conversations to strengthen their trade relationships.
Other countries are doing the same. For instance, China, Japan and South Korea are working on a joint response to U.S. tariffs.
As multiple countries expand their trade relationships with one another and coordinate retaliation, the economic damage that could come from U.S. tariffs may be less painful when spread across countries.
The takeaway
Economic uncertainty remains firmly entrenched, and more tariff announcements could be in the picture in the upcoming months. Businesses should consider strategic investments in areas such as infrastructure and technology to diversify trade partners and bolster their resilience.
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