EconoFACTS

July 21, 2026 | 08:26

New U.S. Tariffs in Context

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

The White House announced that the U.S. will impose 50% tariffs on a wide spectrum of Canadian goods, taking effect August 19^th. The U.S. will use Section 338 of the Tariff Act of 1930, which is an emergency trade authority that gives the President power to impose additional duties of up to 50% on imports from countries that “discriminate against or impose unequal burdens on American commerce”. In this case, the areas in question are alcohol, dairy and autos.

Some quick notes:

Tariffs will not apply to energy, potash, critical minerals, fish and goods already subject to tariffs under Section 232.
The new tariffs will apply to goods covered under USMCA. This is a major break from the current tariff environment, where 90%-plus of Canadian exports not targeted by specific levies have continued to move tariff-free under cover of the exiting trade agreement.
Sifting through the details, the new tariffs will cover a wide range of goods across sectors. It appears that chemicals, plastics, electronics and industrial equipment take the biggest hit proportionally; consumer goods and forestry/wood products are next; and miscellaneous manufacturing, machinery & industrial equipment and agriculture/food products round it out.

All in, the USTR estimates this move will cover US$20 billion of goods (roughly C$28 billion), or about 5% of goods exports to the U.S., and roughly 0.8% of Canadian GDP. If that number is accurate, we judge that the weighted average effective tariff increase from pre-trade war levels, which is currently about 5 ppts, would jump to around 7.5 ppts.

While that still sounds digestible in the aggregate, some specific businesses/industries would be hit extremely hard. And, if the shelter of USMCA is in fact broken, that would do serious further damage to business confidence. This, unfortunately, would come at a time when the Canadian economy is showing signs of breaking out of its slump and returning to decent growth into 2027. As we’ve seen before though, 30 days provides room to de-escalate, and legal challenges would almost certainly follow.

From a U.S. perspective, this won't move the needle much on growth or inflation by itself, but we'll see if any further action on other trading partners follows.

For markets, the loonie has taken the news in stride, slightly stronger since the announcement after a brief and mild dip. Perhaps the market knows how this game is played now. For the Bank of Canada, following a well-behaved CPI report on Monday, this is just a reminder that uncertainty on the trade front has not gone away, and any rate hikes at this stage would need to be considered very, very, carefully—we believe the Bank is firmly on hold this year and, in their words, worsening trade relations with the U.S. could even open the door to easing again.