TD Economics – Weekly Bottom Line

The biggest piece of news this week came Friday morning as the U.S. Supreme Court struck down the U.S. administration’s use of IEEPA legislation to impose tariffs. These duties were 35% on non-CUSMA compliant goods flowing from Canada to the United States. The market reaction was relatively muted as the decision was expected given the skepticism expressed by justices in oral arguments in November. Canadian equities are up this week as rising commodities prices have buoyed prospects for the energy sector. Meanwhile, bond yields were little changed on the week as the stream of economic data left the narrative on the country’s economic prospects relatively unchanged. 

For Canada, the removal of the IEEPA tariffs represents some limited near-term relief, but it would be optimistic to assume this tariff relief is permanent or provides a sustainable upside risk to growth. First, the administration is likely to use other tariff tools, including the possibility to apply 50% duties on countries for trade practices deemed to “discriminate” against the U.S. We expect some new form of tariff regime will be established. Moreover, the IEEPA tariffs only applied to the subset Canadian goods that were not compliant with CUSMA rules of origin and that were not covered under Section 232 tariffs (autos, steel, aluminum, etc.), leaving many goods unaffected by the decision. 

This week’s trade data gives some indication of the tariff impact. Exports to the U.S. were down $30.9 billion through 2025, of which $15.5 billion were in categories of goods affected by Section 232 tariffs. Of the remaining $15.4 billion decline, $13.5 billion is attributable to a decline in oil exports (which have been weighed down by lower prices and refinery outages in the U.S.). The decline in exports of goods that are not oil, gold, or covered by Section 232 was roughly $3.8, down a meagre 1.4% relative to last year. 

So, the focus for Canada remains the trade landscape and ongoing efforts to diversify its trade partnerships. As of December, Canada shipped roughly 68% of its goods exports to the U.S. The figure is down significantly from the 76% registered in December 2024, roughly unchanged since October. The 68% share is similar to the export composition during the pandemic, and a level of interaction not seen in over 40 years (Chart 1). 

The rotation is underway, but it’s not all good news. Exports that are being negatively affected by U.S. tariffs are struggling to find new markets. Much of Canada’s success on the trade front has relied on two commodities; gold and oil. Total exports to the U.S. are down $30.9 billion through 2025, while flows to the rest of the world are up $28.8 (Chart 2). However, strip out the effects of these two commodities and the declines to the U.S. register $19.3 billion with a smaller $10.5 billion offset from the rest of the world. 

This lack of new export markets for affected industries and the prominent role of commodities prone to large price changes does little to assuage concerns about the long-term sustainability of the current export mix, and the prospects for Canadian industry. Looking forward, the CUSMA review is set to pick up steam, and the resulting uncertainty is expected to hang over the economy.

Andrew Hencic, Director & Senior Economist | 416-944-5307