RBC explains why Canada will be the lowest tariffed country

Most Canadian exports to the U.S. remained duty-free in June, according to RBC Assistant Chief Economist Nathan Janzen.

In an August 5 note, Janzen noted that 92% of Canadian exports to the U.S. entered without tariffs, up from 91% in May and 89% in April, based on U.S. Census Bureau data. “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,” he said.

“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,” Janzen said. “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.”

The U.S. applied an average tariff of 2.4% on Canadian goods in June, far below the 8.9% average on all imports. That figure is expected to rise to 35% in August on non-USMCA-compliant items, but RBC estimates just 6% of Canadian exports are affected.

“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,” Janzen said. “The concern remains, though, that U.S. 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.”

Canada’s trade deficit widened to $5.9-billion in June from $5.5-billion in May, but Janzen said the increase was entirely due to a one-time, high-value equipment import from the U.S. for Newfoundland’s offshore oil sector.

He said that without the $2.1-billion spike in imports under logging, construction, mining, and oil and gas field equipment, overall goods imports would have fallen by 1.8% and the trade deficit would have narrowed to $3.8-billion. He added that the large purchase should not impact GDP, as the import subtraction will be offset by higher business investment.

Exports rose 0.9% in June, driven by oil prices, but volumes fell 0.6%. Exports to the U.S. were up 3.1% month over month but remained down 12.5% year over year. For Q2 overall, Janzen estimated export volumes fell at a 31.4% annualized pace, while imports declined 5.7%, setting up net trade to subtract more than six percentage points from quarterly GDP. Early GDP estimates suggest output was flat in Q2, with gains in inventories and consumer spending offsetting the drag from trade.

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