Intelligent Investment
Deal or No Deal
Canada Monthly Market Commentary
August 27, 2025 2 Minute Read
The August 1st deadline for securing trade deals ahead of higher U.S. tariffs came and passed with no deal materializing for Canada. Instead of rushing to sign a potentially bad agreement, Canada opted to continue negotiating and hold out for the best deal. In fact, all the countries that did secure trade deals with the U.S. found that they were still subject to baseline tariffs of at least 15%. While U.S. tariffs on Canadian goods did rise to 35%, an exemption for CUSMA compliant items shields most of Canada’s exports. As a result, the overall effective tariff rate on Canada is estimated to have risen to between 5% to 7%, among the lowest of any U.S. trade partner. Meanwhile, the legality of these U.S. tariffs remain under question and China has been ramping up its trade dispute with Canada.
Trade talks remain ongoing between Canada and the U.S., but some of the focus is beginning to shift to the looming formal review of CUSMA scheduled for July 2026. Partly in preparation for this upcoming review, Canada dropped most of its retaliatory tariffs on U.S. goods by mirroring the U.S. CUSMA exemptions. However, the retaliatory duties on U.S. autos, steel and aluminum remain in effect for now. Consultations and groundwork for the trade talks are already set to begin in the coming months. Given the current state of U.S. trade policy, what would have been a routine renewal of the free trade agreement is now likely to escalate into critical renegotiations with material implications for the Canadian economy.
Throughout most of the drawn-out trade conflict this year, the Bank of Canada has held its policy interest rate flat at 2.75%. Despite headwinds from the uncertainty around trade, the overall Canadian economy has been relatively resilient so far. This has afforded the central bank the breathing room to pause interest rate cuts and wait for more evidence of the trade impacts. Of particular concern is the recent rise in core measures of inflation that make it harder to justify a cut. Leading up to the Bank of Canada’s next meeting on September 17th, there are still a few major economic datapoints to be released that could influence the central bank’s decision. Regardless of timing, the current median projection from economist groups at the major Canadian banks expect two more final interest rate cuts before the end of the year. But this is not the consensus view as some groups are starting to think interest rates may have troughed already and may instead hold at current levels through to the end of 2026.
Economic Highlights:
- Employment fell by 40,800 jobs in July 2025 while the unemployment rate held steady at 6.9%.
- Headline inflation dropped to 1.7% in July 2025 but core measures continue to hold around 3%.
- Retail sales grew by 1.5% in June 2025 with advanced estimates indicating a 0.8% monthly decline in July 2025.
Viewpoints:
- Viable trade deal wasn't on the table ahead of deadline, Canada-U.S. trade minister says
- Trump pushed tariffs on Canada to 35 per cent, but a CUSMA carveout creates a shield
- Ottawa drops some retaliatory tariffs against the U.S. in bid to reset trade talks
- Bank of Canada holds rate at 2.75%, but leaves door open for further rate relief
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