Trump’s trade war has bent, but not broken, the Canadian economy

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Halfway through Canada’s year from hell, the country has yet to fall into the sea.

While not exactly booming, the economy has defied the portents of doom, so far. It’s at least afloat. That alone is heartening, given how grim Canada’s prospects seemed at the outset.

The year started terribly and got worse from there, as Donald Trump returned to office with a serious grudge and the means to use economic force to attack Canada. “What he wants is to see a total collapse of the Canadian economy,” former prime minister Justin Trudeau said in March.

So, the elbows went up, middle fingers extended southward and we vowed to reorient the country, all while wondering if economic ruin was inescapable.

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It still could be. The brunt of tariffs has yet to reveal itself. We’re told that’s likely coming in the back half of the year. And no one is ever safe from Mr. Trump’s whims.

But who would have thought back then that the Canadian stock market would be rocking record highs come Canada Day? Or that growth would be holding up, the job market stable and consumers continuing to spend?

“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,” Frances Donald, chief economist at Royal Bank of Canada, said in a recent report.

There’s plenty more to like – or at least not hate – when you survey the data.

Canada’s capital markets are buzzing with activity, as investors evidently have enough confidence to commit serious money to corporate expansion plans.

Even our exports rose in May after taking a serious hit in April, when tariff salvos were flying in all directions. Trade with non-U.S. countries is picking up and Canadian exports are already less concentrated in the U.S. market than they were just last year.

Plus, inflation is largely behaving itself, giving policy makers the latitude to stimulate the economy as needed.

Could our economy be more resilient to tariffs than everyone thought? Not exactly.

A blanket tariff of 25 per cent on Canadian goods shipped to the United States, as Mr. Trump promised to impose on Day 1 of his second term as President, would have been a hammer blow.

Fortunately, Canadian exporters aren’t facing anything close to that – less than one-tenth, in fact. In April, the average effective U.S. tariff rate on Canadian goods was 2.3 per cent, according to the Royal Bank report.

That’s a big jump from where it was last year — effectively zero. But it’s also the lowest tariff rate facing any of the U.S.’s major trading partners.

Since March, exports compliant with Canada-United-States-Mexico Agreement have been exempted from tariffs. The same trade deal Mr. Trump signed in 2020 appears to serve as an “effective shield” against tariffs today, Ms. Donald wrote.

The big exceptions are tariffs on steel and aluminum shipments, which Mr. Trump has levied under the dubious guise of “national security.” The auto sector has been hit to a lesser extent, with tariffs on non-U.S. components of finished vehicles.

But Canadian oil and gas, wood products and precious metals are among the goods crossing the border freely.

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More Canadian stuff is headed in other directions, too, perhaps an early sign of progress in reducing the country’s reliance on the U.S. market. U.S.-bound exports accounted for 68 per cent of the total in May, down from 76 per cent last year.

It’s worth pointing out that gold is doing much of the heavy lifting here. Economists warn that the meteoric rise in gold prices this year is making Canada’s trade numbers look better than they are.

But at least we’re not seeing the “total collapse” we came to dread a few months ago. “For Canada, the scale of the trade shock thus far appears smaller than expected,” John McNally, senior policy adviser at Scotiabank Economics, wrote in a report.

That’s a common thread in the indicators of late:

• Gross domestic product contracted only slightly in April – by 0.1 per cent. While industries in the line of fire, such as manufacturing and transportation, have been hit hard, the rest of the economy has held up relatively well.
• Terrible household sentiment data have not translated into weak consumer spending. Retail spending rose by 0.3 per cent in April.
• While the unemployment rate has edged up to 7 per cent, hiring conditions seem to have stabilized. A modest 8,800 jobs were added in May.
• The S&P/TSX Composite Index is up by 9.3 per cent so far this year. A boom in financings seemed to take hold in June, as investment banks raised more than $3.5-billion in equity sales for TSX-listed companies. That’s more than the first five months of the year combined.

Canada still faces deep structural problems and a breakdown in the economic status quo. But at the midway point of a deeply destabilizing year, we’re still kicking.