Imminent US tariffs on specific Canadian goods threaten to weigh on growth in Canada and derail trade renegotiation talks by reigniting a tit-for-tat trade war, undermining business confidence and further weakening Canada's already limited negotiating leverage, according to Capital Economics in a note.
The 50% Section 338 tariffs are due to take effect on Wednesday and cover around C$20 billion of Canadian exports, or roughly 5% of last year's shipments to the United States. They could raise Canada's effective tariff rate to 5.6% from 2.9% in June, Capital Economics said.
"Near-term GDP growth will also suffer, though a recession remains unlikely," wrote Capital Economics North America Economist Bradley Saunders.
With the goods exposed to these US tariffs accounting for around 0.6% of gross domestic product, a sharp drop in exports could push already-weak growth back towards zero, added Saunders.
The bigger risk is to the trade talks on renegotiating the US-Mexico-Canada Agreement (USMCA), or CUSMA as it's known in Canada, according to Capital Economics. Canadian retaliation could reverse recent diplomatic progress, while concessions to avert the tariffs could further erode Ottawa's bargaining power.
With investment already weak and limited scope to diversify away from the US, Canada remains highly exposed to prolonged trade uncertainty. Capital Economics' base case is that USMCA will be renewed over the coming year.