U.S. tariffs aren’t hobbling Canada, RBC says

Royal Bank of Canada assistant chief economist Nathan Janzen said in a Feb. 19 report that Canada’s merchandise trade deficit narrowed to $1.3-billion in December from $2.6-billion in November, capping a volatile 2025 shaped by U.S. tariffs.

Janzen said Canada’s trade flows were “heavily impacted by U.S. tariffs but still by less than feared earlier in the year when tariff threats were at their most extreme.”

While products specifically targeted by tariffs, including steel, aluminum, forestry and certain motor vehicles, saw steep declines, about 89% of Canadian exports continued to cross the U.S. border duty-free in December under CUSMA compliance.

For the full year, merchandise exports were down 0.2% from 2024. Excluding price effects, export volumes fell 2% year-over-year. Steel export volumes declined 24% in 2025, forestry products fell 8%, and aluminum volumes dropped 15%, though higher prices softened the nominal impact. Motor vehicle exports were largely unchanged on a volume basis.

December’s 2.6% monthly increase in exports was concentrated in gold and aircraft shipments, while imports were boosted by a rise in equipment purchases, a potential positive signal for business investment. Janzen said net trade is tracking as a one percentage point add to Q4 GDP, following a three-point contribution in Q3.

Despite tariff disruptions, the average effective U.S. tariff rate edged down to 9.3% in December from 9.8% in November, with the rate on Canadian imports declining to 3.1%. Canada remained the top source of imports for 22 U.S. states in 2025.

Canada’s share of U.S. imports fell to 11.2% in 2025 from 12.6% in 2024, while the share of Canadian exports destined for the U.S. declined to 71% from 75%, reflecting increased shipments to non-U.S. markets, particularly gold exports to the U.K.

Looking ahead, Janzen said significant uncertainty remains with CUSMA renewal negotiations set to begin in the coming months. However, RBC’s base case assumes a more stable trade backdrop in 2026, albeit at higher tariff rates, leaving trade as “less of a headwind to growth than it was in 2025.”

He added that lower U.S. tariff rates, prior Bank of Canada rate cuts and higher government spending should support further improvement in per-person and per-worker economic conditions in the year ahead.

-30-