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 country's 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.

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."

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 waits to see more data, but Donald says the bank has room to move if and when a further drop in rates is warranted.

"We think the central bank is now at the end of its cutting cycle and do not expect further reductions. But, that is contingent on the economic growth backdrop and labour markets stabilizing," wrote Donald and Janzen.

On the fiscal front, they say the federal government has posted high deficits in recent years. But relative debt levels remain among the lowest in the developed world.

Tapping into the fiscal capacity could help spur on some much-needed growth.

"Action on interprovincial trade barriers could pay long-run dividends helping to support investment and productivity growth."

They also point to tax policy changes, loan programs and recently announced defence spending that could boost growth through next year.

But a key factor in Canada's growth prospects actually stems from the increasing isolationism in the United States. She says the trade shock has forced economies around the world to rethink their reliance on the U.S.

"Canada's resources — agriculture, energy, and critical minerals — are increasingly well positioned to support the needs of the global economy, particularly as it seeks to expand AI/data and defence spending," wrote Donald and Janzen.

That shift "represents a moment for Canada to invest in itself and fulfil this need."

The RBC report does not diminish the very real threats Canada is facing, nor does it minimize the impact the trade war and all its uncertainty are already having.

But it does offer an honest recalibration of where Canada stands now and how much that position has changed in three whiplash-inducing months of changes to global trade.