RBC Economics says new Section 338 duties will sting targeted sectors but spare the broader recovery
A fresh wave of United States tariffs targeting plastics, electronics, furniture, and other Canadian-made goods will slow specific industries and deepen provincial divides. But the broader economic recovery is likely to hold, according to a new analysis by Royal Bank of Canada (RBC) Economics. The assessment comes from chief economist Frances Donald, assistant chief economists Nathan Janzen and Claire Fan, and economist Salim Zanzana.
The team said the outlook is "once again clouded by the latest bout of US tariff threats" and that "the path ahead could be bumpier" than recent data suggested.
The new Section 338 duties of 50% on a targeted basket of Canadian goods are set to take effect August 20. They cover roughly 5% of Canada's exports to the US, leaving more than 80% of Canadian goods still crossing the border duty-free under the Canada–United States–Mexico Agreement (CUSMA).
The average effective tariff rate on US imports from Canada would climb from around 3% to 5.5%, the report noted, still below the 6%–7% levied on major trade partners such as the European Union and the United Kingdom.
That context matters for mortgage brokers advising clients who are already navigating a prolonged Bank of Canada rate hold and softening housing demand.
Donald, Janzen, Fan and Zanzana said they continue to expect aggregate growth to improve in the second half of 2026 and the unemployment rate to trend downwards, provided the tariffs land as currently threatened.
New tariffs announced by U.S. President Donald Trump are adding fresh uncertainty to Canada's economy, raising concerns about homebuyer confidence, interest rates, and the path forward for the housing market.https://t.co/2IGPBLg8pM
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 22, 2026
Targeted sectors face the heaviest burden
The sectors most exposed — plastics product manufacturing, furniture, electrical machinery, and beverage production — will face genuine headwinds, the report said. Yet the RBC Economics team argued the damage may be more contained than earlier tariff rounds on steel and aluminum.
Only about 3.7% of total US imports of these newly targeted goods came from Canada in 2025, making substitution relatively easy for American importers.
The reverse, however, is far harder. Approximately 81% of Canada's exports of the tariffed products were destined for the US in 2025, with plastics and articles showing a dependence as high as 92%.
"Trade diversification remains a more elusive goal for Canada," the authors wrote, one "that will take considerable time to achieve."
Plastics product manufacturing, which accounts for the largest nominal dollar value of at-risk exports, derived roughly half its value added and employment from US demand in 2024 — significant, but well below the nearly 80% dependence seen in auto and aluminum production, the report said.
For breweries, wineries and distilleries, the share tied to U.S. demand drops to around 15%, and the team concluded that "a higher domestic market share should provide better insulation" for those industries from volatile US trade policy.
The provincial picture is also shifting. Ontario, Quebec, and British Columbia are expected to bear the largest share of higher effective tariff burdens, while energy-producing provinces remain largely shielded.
Bank of Canada holds its ground
For brokers tracking the rate environment, the RBC team's base case is unchanged: the Bank of Canada (BoC) will hold its overnight rate — currently at 2.25% — through year-end.
The authors noted the BoC is caught between two competing pressures: the need to support a tariff-burdened economy and the need to keep inflation in check with Middle East conflict pushing oil prices higher.
"Both risks are meaningfully coming back in play as July winds up," they wrote.
As a result, the team said it continues to expect the BoC to hold the overnight rate at current levels through year-end, "while closely monitoring incoming data on inflation expectations and business sentiment."
On the economic data front, RBC expects Canada's real gross domestic product to have expanded 0.2% in May — above Statistics Canada's preliminary estimate of 0.1% — building on a robust 0.5% gain in April.
Growth was likely broad-based, with oil and gas extraction, manufacturing, retail, and real estate all contributing.
Real estate, rental and leasing likely recorded a fourth consecutive month of gains, the report noted, "as housing activities continue to heat up over the summer."
Business sentiment is the remaining wildcard. Even if the tariffs are walked back before the August 20 deadline, the RBC team warned the uncertainty itself will slow investment decisions. "There won't be a persistent re-acceleration in Canadian productivity growth without business investment coming online," they wrote.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
