Friday Night Trade Fights?

As we expected, late Tuesday night President Trump decided to postpone applying 50% tariffs External link. on about 5% of Canadian exports to the US, citing progress on trade negotiations with Canada. But this reprieve in trade tensions was for a mere three days. As such, similar brinkmanship could play out tonight, as duties are set to be applied at 12:01 a.m. Eastern Time on August 22, 2026.

However, since Tuesday’s tariff postponement, details of the potential deal have started to trickle out, even if unofficially. For instance, provincial premiers have been quite open about the ask to return American alcohol to store shelves. Whether they do it is another question, as it will certainly depend on what they get in return. Rumoured reductions in steel and aluminum duties from 50% to 25% have been bandied about. Similarly, lower levies on autos, from 25% to 15%, could also be on the table. One sticking point will no doubt remain dairy quotas and tariffs. While President Trump has declared victory on this front as well, the federal government continues to vigorously defend Canada’s supply management system. With this in mind, it’s reasonable to ask: Did Canadian negotiators put enough concessions on the table to satisfy the president and avoid the latest duties? Will the concessions be worth it? And will they be enough to stave off future tariff threats? As of the time of writing, these questions remain unanswered (although they were explored in greater depth in last week’s commentary External link.).

What we do know is that sustained trade uncertainty is weighing on the Canadian economy. Volatile trade and inventory numbers have largely been driving the recent swings in headline real GDP growth External link. (graph 1). At the same time, final domestic demand growth has been surprisingly resilient in the face of recent economic uncertainty stemming from US actions at home and abroad. But this is being heavily supported by significant federal income transfers External link. boosting consumption and heighted public spending on health care External link. and defence External link. propping up the government contribution to real GDP. As such, it’s not clear whether the recent strength in the Canadian economy is truly the result of underlying resilience or if it’s because of debt-financed public spending instead. If the latter, it may be the economic equivalent of a sugar high that isn’t likely to last, although the resulting debt incurred could stay on the books indefinitely.

Business investment is the component of final domestic demand that is least adulterated by expanding government spending. Of course, various levels of government are doing their best to support industries most directly impacted by tariffs, such as steel, aluminum, autos and lumber. But these measures have tended to be quite targeted to date. And broader supply-side measures, such as those introduced in Budget 2025 External link., are no doubt also helping to support investment in a variety of productivity-enhancing structures, equipment and software. The frenetic pace of investment announcements and strategies External link. at the federal level is also attracting looks from global investors, many of whom will be coming to Toronto in September to kick the tires on possible opportunities. This is broadly a good news story for private investment in Canada.

However, despite all the support and activity underway by governments in Canada, business investment has remained on the sidelines for much of the last year and a half. And that isn’t likely to change any time soon. (See our latest Economic and Financial Outlook External link..) According to the Bank of Canada’s most recent Business Outlook Survey, the trade fears that caused business sentiment to crater in the first six months of 2025 have now been supplanted by concerns over rising costs (graph 2). This is in large part thanks to higher energy prices and predates the latest trade tumult, which risks pushing business sentiment even lower in Q3 2026.

Of course, as we have regularly pointed out External link. in the past, not all provinces have been equally impacted by recent trade and energy shocks. Alberta and Saskatchewan have benefitted from preferential tariff rates on US imports of energy and potash, while the recent increase in commodity prices has boosted their corporate and government revenues. And these exemptions look set to persist under the latest set of proposed tariffs as well. In contrast, Quebec, Ontario and British Columbia have felt the fuller impact of US tariffs, and this risks getting worse if the latest threats are realized (graph 3). As such, we expect two-speed business investment in Canada for the foreseeable future: respectable investment in non-residential structures linked to mining and oil and gas versus sluggish investment in machinery and equipment.

Keep in mind, this dismal outlook for Canadian business investment assumes little in the way of tangible and tractable progress on trade talks between Canada and the US. If a deal is reached that meaningfully improves the North American trade environment, that would be the best outcome for both countries. Hope springs eternal that this Friday night trade fight ends in a draw and blossoms into a durable friendship.