Section 338 Tariffs and Canada: Limited Macro Effect, Rising Strategic Risks

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Section 338 Tariffs and Canada: Limited Macro Effect, Rising Strategic Risks

IdeaM

Executive Summary

The immediate macroeconomic impact of the new Section 338 tariffs appears

contained, but the strategic implications are more consequential. The proclamations

identify a little over US$20 billion of Canadian trade, but effective coverage falls to

approximately US$18 billion after accounting for goods already subject to Section 232.

Qualifying civil-aircraft goods are also excluded, although the effective treatment of some

mixed-use tariff lines is difficult to estimate precisely. We estimate the 50% additional

tariffs could lift the effective tariff rate on Canadian goods by roughly 2 percentage

points, to around 5-6%, while raising the overall U.S. tariff rate by only 0.2 percentage

point. Crucially, USMCA-compliant goods are not exempt, cutting through protections

that had insulated much of Canadian trade from earlier actions.

Exposure is concentrated in intermediate and consumer goods, including plastics and

packaging, wood and paper products, furniture, machinery, food and selected electrical

equipment. On our gross product mapping, consumer goods account for around US$7

billion, equivalent to more than 10% of Canadian consumer-goods exports to the United

States, although actual duty-bearing exposure is somewhat lower after product-level

exclusions. Canada is also difficult to replace in several affected categories because of its

high share of U.S. imports and the bulky, perishable or supply-chain-specific nature of

many products. Near-term costs are therefore likely to be shared between lower margins

for Canadian exporters and higher prices for U.S. purchasers.

For the Bank of Canada, the main risk is that weaker exports interrupt the expected