Canada has dramatically reduced the retaliatory tariffs it imposed during the trade disputes of recent years, bringing the average levy on US imports down to just 1.5%. But that hasn't been enough to reverse a slide in American exports north of the border, according to a new analysis from BMO Capital Markets.
BMO, the investment banking arm of the Bank of Montreal, reports that US exports to Canada have fallen roughly 5% over the past 18 months. The finding suggests that the lingering effects of trade uncertainty—and not just the tariff rates themselves—are reshaping cross-border commerce.
Tariffs Are Down, But Trade Friction Lingers
Ottawa has removed most of the retaliatory tariffs it had placed on US goods in response to earlier American trade actions. Using estimates from the Bank of Canada, BMO calculates that Canada's average tariff on US imports now stands at 1.5%—a level that is low by historical standards and unlikely to be a major deterrent on its own.
Yet the decline in US exports to Canada persists. BMO's analysis points to a broader pattern: the past 18 months of trade tension have not only changed what Canada sells to the US but also how much the US ships north. The drop of about 5% in US exports suggests that businesses on both sides of the border have adjusted supply chains, sought alternative sources, or simply become more cautious about cross-border trade.
This dynamic is playing out against a backdrop of ongoing tariff threats. The US has recently threatened to impose 50% tariffs on Canadian goods in disputes over dairy and alcohol, as reported earlier. Such headlines, even when not resulting in immediate action, can chill business confidence and investment decisions.
What It Means for Investors
For everyday investors, the disconnect between low tariffs and falling exports is a reminder that trade policy affects markets in complex ways. Tariff rates are only part of the story; the uncertainty around future trade rules can be just as powerful.
Companies that rely heavily on cross-border supply chains—such as automakers, agricultural exporters, and manufacturers—may face headwinds even when official tariff rates are low. The uncertainty can lead to delayed capital spending, inventory adjustments, and shifts in sourcing that take months or years to reverse.
Investors with exposure to US companies that sell into Canada should be aware that the 5% export decline may reflect a structural shift rather than a temporary blip. Similarly, Canadian companies that compete with US imports may benefit from reduced competition, even if tariffs themselves are low.
The Canadian dollar has also been sensitive to trade developments. The loonie has edged up recently on oil price support, but tariff threats continue to cap gains. A weaker Canadian dollar makes US exports more expensive for Canadian buyers, potentially compounding the export decline.
Broader Trade Picture
The US-Canada trade relationship is one of the largest bilateral trading partnerships in the world, with hundreds of billions of dollars in goods crossing the border each year. Even small percentage changes in trade flows can have significant economic impacts.
BMO's findings come as other regions also grapple with tariff uncertainty. The US has threatened 200% tariffs on generic drug imports from Switzerland, as noted in our coverage, and Latin American markets have faced new tariff headwinds from the US, as we reported. These developments underscore a global environment where trade policy remains a key risk factor for investors.
For now, the data from BMO suggests that even as Canada has moved to de-escalate, the damage to trade flows may take time to repair. Investors should watch for further signs of whether the export decline stabilizes or deepens, and whether future trade negotiations can restore confidence.
