Article content

Sign In or Create an Account

or View more offersArticle content

Canada’s AA+ rating can withstand the most recent volleys in the trade war with the United States, but further escalation would put pressure on the credit profiles of both federal and provincial governments, Fitch Ratings warned this week.

Article contentWe apologize, but this video has failed to load.Try refreshing your browser, or
tap here to see other videos from our team.We apologize, but this video has failed to load.Try refreshing your browser, or
tap here to see other videos from our team.Article content

Canada imposed tariffs on $27.6 billion worth of U.S. goods on Tuesday, matching dollar for dollar the Section 338 duties that U.S. President Donald Trump launched on Aug. 22 after trade talks collapsed.

Article content

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

In response, Trump slapped a ban on a range of goods from alcohol to motorcycles to dairy products, aluminum and furniture to take effect Sept. 29.

Article contentArticle content

As it stands now, U.S. tariffs cover about 5 per cent of Canadian exports to the United States while Canadian tariffs cover for about 7 per cent of U.S. exports to Canada, said Fitch in a report this week.

Article content

“Further escalation could test Canada’s resilience to the measures,” it warned.

Article content

The tariff impact will vary across the country, hitting Ontario and Quebec, both of which Fitch rates AA-‌/stable, the hardest. British Columbia, rated AA-‌/negative, is also vulnerable because of its forestry and metals industries.

Article content

In a trade war, the numbers weigh heavily in favour of the Americans. Canada sells about 75 per cent of its exports to the United States, equal to almost 20 per cent of the country’s gross domestic product.

Article content

The United States sells only 15 per cent of its exports to Canada, about 1 per cent of its GDP. 

Article content

“Canada therefore faces much larger trade exposure,” said the Fitch team led by director Joshua Grundleger. “Even so, political considerations may limit how much this asymmetry strengthens the U.S. negotiating position.”

Article content

Story continues below

This advertisement has not loaded yet, but your article continues below.

Article content

Unlike earlier tariffs, the Section 338 penalties apply regardless of compliance to the Canada-United-States-Mexico-Agreement (CUSMA), showing that the U.S. can bypass that trade deal with other legal authorities.

Article contentRead More

  1. Despite trade war, ‘Elbows up’ has its limits
  2. Tariff ‘double whammy’ headed straight for these Canadian businesses, report says
  3. Story continues belowThis advertisement has not loaded yet, but your article continues below.

Article content

However, Section 338 has never been used this way before and has not been tested in court, Fitch points out.

Article content

“That could invite challenges and weaken the durability of any tariff regime built on it,” said the report.

Article content

Nathan Janzen, assistant chief economist at Royal Bank of Canada, said the United States’ latest response to Canada’s retaliatory tariffs “may sound alarming, but they represent a relatively minor escalation in the trade war.”

Article content

“The real risk remains further escalation into a tit-for-tat trade war covering a much larger share of trade — something that hasn’t occurred with this latest development yet,” he said.

Article content

What are the risks of further escalation?

Article content

Trump has promised to double tariffs on autos and parts to 50 per cent starting Jan. 1, 2027. This escalation would hurt both countries because the auto industry is heavily integrated, but it would weigh more heavily on Canada’s growth and external balances, said Fitch.