Tariffs re-enter the spotlight

Key takeaways

• New U.S. tariffs are unlikely to significantly alter the economic outlook
• U.S. labor market data continues to point to resilience
• Canada faces ongoing growth challenges amid trade uncertainty

Trade policy returned to the spotlight this week as the United States announced new tariffs on 60 countries, with rates of either 10% or 12.5% depending on the trading partner.

While the announcement may appear significant, the broader context is important. These tariffs are being implemented under Section 301, which allows the U.S. government to impose tariffs following trade investigations.

In many cases, the new tariffs effectively replace temporary tariffs that were previously implemented under Section 122. As a result, they represent a change in legal framework rather than a substantial increase in tariff rates.

From our perspective, this means the economic impact is likely to be limited. We continue to expect that any drag on growth or inflation from tariffs will fade as we move into the second half of the year.

Attention is also beginning to shift toward upcoming USMCA negotiations. One key area to watch will be potential changes to rules of origin requirements, which determine how much North American content is required for goods to qualify for tariff exemptions.

While tighter rules could modestly increase effective tariff rates, our base case remains that a trade agreement will ultimately be reached and that the overall impact on North American trade will remain manageable. However, there could still be some twists and turns before the agreement is signed.

This week brought additional evidence that the U.S. labor market remains in solid shape.

Job openings came in above expectations, indicating continued demand for workers. Private-sector employment data from both ADP and Revelio Labs also pointed to job growth of more than 100,000 positions in May.

The May non-farm payrolls report also showed hiring well above consensus expectations.

A resilient labor market continues to support household spending and reinforces the outlook for steady economic growth. For now, the data remains consistent with a U.S. economy that is navigating uncertainty while maintaining positive momentum.

The outlook in Canada remains more difficult.

Unlike the United States, Canada’s economy has shown more signs of fragility, in part because of uncertainty surrounding future trade arrangements. In fact, Canada recently entered into a technical recession. And even with May’s unexpectedly strong jobs report, the unemployment rate in Canada is still above its long-term equilibrium. Until a final trade agreement is reached, many businesses could be somewhat hesitant to invest or expand hiring plans.

While we expect the Bank of Canada to leave rates unchanged at next week’s meeting, the broader economic backdrop suggests further policy easing may be required later this year. The headwinds facing Canada’s economy have not fully dissipated, and we would be careful not to over-extrapolate the strength from a single jobs report in May.

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