How Canada emerged as the safest port in a storm of global trade

When the trade war began in February, Canada looked like it might have been one of the countries hardest hit by U.S. tariffs. But in three months of head-spinning volatility, the on-again, off-again threats have expanded, Canada has negotiated sweeping exemptions and economic data has held up remarkably well.

A new report from RBC’s chief economist Frances Donald and associate chief economist Nathan Janzen found that Canada now faces the lowest average effective tariff of any major U.S. trade partner.

“While Canada’s economic path forward remains challenging, it appears considerably less treacherous than it did just a few months ago — a narrative that has yet to permeate the Canadian psyche,” they wrote.

RBC found that 86 per cent of the products Canadian businesses shipped to the U.S. last year would still be duty-free under today’s rules. Data from the U.S. Census Bureau in April show nearly 90 per cent of  Canadian exports to the U.S. remained duty-free in April. 

“The average effective tariff on U.S. imports from Canada was 2.3 per cent — up significantly from essentially zero in January — but the lowest of any major U.S. trade partner,” the authors wrote.

So, they say, Canada seems to have emerged as the safest port in a global storm — for now. 

Still some damage

That’s not to say the trade war isn’t causing damage. It is. Some of that damage has shown up in the economic data.

Statistics Canada’s numbers released this week showed manufacturing sales saw the biggest drop-off in years.

“Total manufacturing sales declined 2.8 per cent to $69.6 billion in April, the largest month-over-month decrease since October 2023 and the lowest level since January 2022,” it said in a release on Friday.

The unemployment rate has continued its relentless climb, now at seven per cent. Outside of the COVID-19 pandemic, that’s the highest it’s been since 2016. Unsurprisingly, both the manufacturing drop-off and the job losses have been concentrated in trade-sensitive areas like southwestern Ontario.

But the RBC team writes that the Canadian economy has held up remarkably well so far.

They say confidence plummeted when the trade war began in March, according to consumer sentiment surveys.

“But actual spending data has not matched that scale of weakness.”

Strength from two key fronts

Yes, employment has weakened, but job postings on job search sites like Indeed.com have shown signs of stabilization.

Canada also gets strength from having lots of wiggle room on two key fronts: fiscal and monetary policy.

Fiscal policy is government spending. Monetary policy refers to interest rates set by the Bank of Canada.

The central bank aggressively cut rates last year. Its key overnight lending rate has already come down 225 basis points (from five per cent to 2.75 per cent). Governor Tiff Macklem has held rates unchanged for three straight meetings now as he…