Financial markets largely brushed aside President Donald Trump's latest tariffs on Canada on Tuesday, viewing the measures as negotiating leverage rather than a fundamental shift in the North American trade outlook, according to economists.
"Markets have taken President Trump's latest tariff jab in stride," Royce Mendes, head of Market Strategy at Desjardins, said in a note Tuesday.
Clinging to Section 338 of the Tariff Act of 1930, the US administration Monday accused Canada of unfairly discriminating against American products in sectors including dairy, alcoholic beverages and automobiles. The affected goods will lose US-Mexico-Canada Agreement exemption eligibility, with the new 50% tariffs set to take effect in 30 days.
"Markets responses have remained muted thus far," wrote Andrew Hencic, director and senior economist at TD Economics, in a note. "The loonie is down 0.2% since yesterday, while rate expectations for the Bank of Canada are relatively unchanged."
The announcement is broadly in line with the escalation most economists expected at this stage of the USMCA negotiations. It reflects President Trump's longstanding strategy of using access to the US market as leverage to secure concessions from trading partners, Mendes said.
The implied volatility levels in the USD/CAD exchange rate "are still near the bottom of the advanced-economy league table, suggesting that many investors see the tariff announcement as a prelude to negotiations, not a material peril to the Canadian economy," said Karl Schamotta, chief market strategist at Corpay, in a Tuesday note.
The 30-day implementation period for the tariffs provide scope for further negotiations, raising questions over how long the tariffs will remain in effect given the ongoing USMCA talks, added TD's Hencic.
Speaking to reporters in Ottawa on Tuesday, Canadian Prime Minister Mark Carney said he spoke with Trump Tuesday and that the two "agreed to intensify negotiations in the coming weeks, " reported CTV News, adding that Carney also said the 50% tariffs violate the USMCA, or CUSMA as it's known in Canada.
The US Trade Representative estimates the new tariffs will cover $20 billion of goods, or about C$28 billion. That's roughly 5% of goods exports to the US and roughly 0.8% of the Canadian gross domestic product. If that number is accurate, Bank of Montreal Capital Markets forecast that the weighted average effective tariff increase from pre-trade war levels, which is currently about 5 percentage points, would jump to around 7.5 percentage points.
That the US administration used a 1930 provision with no judicial precedent means there is the "potential for legal challenge," wrote UBS Global Research on Tuesday.
Most economists' outlook already factors in a period of elevated trade uncertainty extending through the third quarter.