The collapse of US-Canada trade talks and the tariffs that followed will likely have a limited direct effect on Canadian growth, according to Bank of America, but the bank is more concerned about the hit to business confidence and the damage done to prospects for renewing USMCA.
Trade talks collapsed on August 21, prompting the US to impose 50% tariffs on roughly US$20 billion of Canadian goods and Canada to suspend negotiations and announce dollar-for-dollar retaliation effective September 8.
A deal had appeared close days earlier, but fell apart amid disputed last-minute demands, with Canada citing new US limits on its ability to sign trade deals with third countries and the US saying Canada declined to finalize already-agreed terms.
Bank of America analysts see limited direct damage but a bigger confidence problem. Analysts expect only a modest macro impact, since the tariffs cover just over 5% of Canadian exports to the US and the damage should be contained mainly to dairy, alcoholic beverages, autos and parts of manufacturing.
What worries the bank more is the confidence channel. Analysts argue that renewed uncertainty is likely to weigh on investment, and potentially on hiring, more than the tariffs themselves, a signal they see as more consequential for the economy than the direct trade losses.
Bank of America believes the trade breakdown makes USMCA renewal harder, as suspended talks and eroded trust reduce the odds of a smooth deal and prolong North American trade uncertainty, weighing on investment and growth in both Canada and Mexico. This builds on an already weakened outlook after the US decision not to extend USMCA at its July 1 review put it on track to expire in 10 years.
The latest escalation lowers the chances of an early extension, according to analysts.
The bank sees risks skewed to the downside, with a bigger economic hit or further escalation potentially prompting a Bank of Canada rate cut, and flags September 8 as the next key catalyst.