Canada: Trade shock and GDP drag – TD Securities

TD Securities’ Robert Both analyzes the impact of new Section 338 US tariffs and Canada’s retaliation on the Canadian economy. The report estimates the combined measures will trim about 0.3 percentage points from GDP by 2027, with growth effects concentrated in late 2026. Fiscal supports of CAD 7.5bn are expected to partially cushion the blow while inflation effects remain contained.

Tariff escalation and growth outlook

"The higher tariff rate under Section 338 and lack of USMCA carve outs will push total policy-implied tariff rates towards 7.5% from ~5.0% over Q2, which would mark the highest rate since the 35% IEEPA tariffs were replaced with Section 122. That also compares to a 3.5% tariff rate if the proposed reductions to steel/aluminum (50% to 25%) and autos (15% from 25%) had gone ahead. As such, this marks a material escalation in the ongoing trade dispute between the US and Canada, though tariff impacts should prove less broad-based given the targeted nature of Section 338."

"We look for new 338 tariffs to shave ~0.3pp from the level of GDP by the end of 2027. Growth impacts will be front-loaded over late Q3/Q4, while the fiscal response is likely to stretch further into 2027. The direct hit from US tariffs will sap some momentum from what has been a sharp rebound in Canadian exports over the first half of 2026, with primary metals and motor vehicles contributing to recent strength, but we do not expect to see outright contractions in quarterly GDP."

"Canadian retaliation would raise ~$8.4bn in annual tariff revenues at 2025 import levels, which could pose a threat to the domestic inflation outlook, but total revenues will be smaller with substitution effects. Industrial goods will also account for a large share of CAD tariff revenues, with ~30% of revenues coming from steel products alone. That will help to mitigate the impact on consumer prices, which did not see material pass-through from the tariffs imposed over 2025."

"The Bank of Canada could prove more sensitive to upside inflation risks amid the ongoing supply shock to global energy supplies, but without further escalation we do not see domestic inflation impacts exceeding 0.2pp on CPI by the end of 2027."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)