It’s been a few months since the U.S. imposed tariffs on Canadian imports. While the outlook on trade remains as uncertain as ever, things might not be as bleak as they seemed back in March.
Despite the imposition of a 25 per cent tariff on all Canadian imports excluding energy products, the reality is more nuanced. A crucial point is that goods that comply with the Canada-United States-Mexico Agreement (CUSMA) are exempt from tariffs.
As a result, the effective tariff rate the U.S. has on Canadian imports was only at 2.3 per cent in April—the lowest of all major U.S. trading partners and one of the lowest among all countries. In April, nearly 90 per cent of Canadian exports reached the U.S. market without incurring tariffs.
Thirty-eight per cent of Canadian goods sent to the U.S. in 2024 were CUSMA-compliant; that figure has since climbed to more than 50 per cent.
Before this year, there was little incentive to go through the administrative steps to ensure CUSMA compliance since non-compliant goods were exempt from tariffs under the free-trade agreement. Now, businesses have a significant incentive to make their goods CUSMA-compliant, as the tariff-free benefit outweighs the administrative burden.
Jobs in the trade sector saw an increase in May after a sharp decline in April, indicating that trade has resumed after the initial shock.
The effective tariff rate on goods from Canada and Mexico might remain below 5 per cent, therefore demand for Canadian goods is expected to remain solid.
Canada also chose not to retaliate after the U.S. raised its global steel and aluminum tariffs to 50 per cent earlier this month. This would limit the effects of retaliatory tariffs on Canada’s inflation rate.
At the same time, opportunities are emerging elsewhere as Canadian provinces actively remove barriers to domestic trade. One example was Ontario and Manitoba’s agreement last month to ease barriers on the flow of goods, services and workers between the two provinces.
Canadian businesses are also exploring expansion into other markets, including Europe and Asia.
Of course, there are several potential risks to monitor. A sharp downturn in the U.S. economy could lower demand for Canadian exports, new developments on trade could sour at any moment and the ongoing conflict in the Middle East could pose a concern for the global and Canadian economies.
With these considerations in mind, the probability of a recession brought about by tariffs has markedly decreased—and the outlook is relatively more positive now than it was a few months ago.
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