U.S. Imposes 35% Tariff on Canada Amid Trade Talks

Investors have become accustomed to tuning out tariff announcements as mere negotiating tactics rather than concrete policy commitments, as the U.S. and Canada continue their trade talks. The White House recently announced a new set of tariffs on Canada, with President Donald Trump posting on social media that Canada would face an additional 35% tariff rate on products not already subjected to sectoral tariffs. The reason given for the new tariffs was Canada’s own retaliatory tariffs, which were issued on March 12 in response to earlier U.S. levies.

The new tariffs are scheduled to take effect on Aug. 1, following a 90-day pause that expired on July 9. This week, the White House sent letters to multiple countries, including major trading partners like South Korea and Japan, informing them of their recent tariff rates. This move has renewed focus on the U.S.’s global trade relations.

David Bianco, chief investment officer of DWS Americas, commented, “Tariffs are Trump’s hammer for every nail that he thinks needs fixing.” However, the administration’s unwillingness to enforce these tariffs has led markets to brush off the latest round of tariff back-and-forths, assuming the U.S. will continue to hold off on collecting them. Jason Pride, chief of investment strategy and research at Glenmede, stated, “The base case expectation is that major trading partners that are perceived to be negotiating in good faith will receive extensions to accommodate additional talks.”

The U.S. and Canada have been in talks for a new trade agreement since last month, aiming to reach a deal by July 21. The most recent tariff rate is viewed by some as just a negotiation tactic meant to gain an advantage, rather than a steadfast policy commitment. Fears that the latter was the case ultimately led to a market selloff in April. However, once investors realized the administration’s comments about trade policy did not necessarily translate into action, markets roared back.

Christian Chan, chief investment officer at wealth management firm AssetMark, noted, “The administration’s communication on tariffs has been erratic to say the least. This has contributed to a lot of ‘noise around the signal,’ and markets are getting a bit numb.” He added, “Ultimately, I think markets believe deals will get done, but this does show how volatile negotiations can be.”

With this new 35% tariff rate, Canada is increasingly subjected to a sprawling web of tariffs. Earlier this year, the U.S. instituted a 25% tariff on all goods not covered by the U.S.-Mexico-Canada trade agreement signed in November 2018. Canada also faces the same sectoral tariffs as the rest of the world, including a 25% tariff on automobiles and 50% tariffs on steel, aluminum, and starting Aug 1. also on copper. Canadian energy imports face a 10% tax.

Canada levied tariffs of its own against the U.S. with a 25% import tax on roughly $30 billion worth of U.S. goods. In his letter, Trump also threatened to raise those tariff rates if Canada retaliated further. He wrote, “If for any reason you decide to raise your Tariffs, then, whatever the number you choose to raise them by, will be added onto the 35% that we charge.”

Both U.S. and Canadian stocks sank on Friday. Investors see the likelihood of deeper losses as minimal, as they count on a trade deal ultimately being negotiated. There will be “little impact to the U.S. or Canadian economy if it is likely if [it is] resolved this summer,” Bianco said, though he did add there were near-term consequences to the exchange rate between the Canadian and U.S. dollars if the Federal Reserve didn’t signal cuts were on the way.

Canada’s latest economic report, released Friday, far outpaced analyst expectations. The economy added about 83,000 jobs in June compared to a forecast that expected the labor market to be roughly flat. However, Canada does face 6.9% unemployment, which exceeds the 4.1% rate in the U.S., but that was still an outperformance as economists had expected an unemployment print of 7.1%.