1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 8
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
USMCA exemptions limit U.S. tariff hike shock on Canada and Mexico
calculated duties % of imports value
40%
37.1%
30%
2024
Sep-2025 (latest)
20%
10.7%
10.6%
10%
7.2%
4.7%
3.9%
2.3%
1.2%
0.1%
0.2%
0%
World
China
E.U
Canada
Mexico
Source: U.S. ITC, Scotia Wealth Management.
On the global stage, the U.S.-Mexico-Canada Agreement (USMCA) review in mid-year could
revive the tariffs sabre-rattling and uncertainty that has broadly cooled since 2Q25 around
Liberation Day and U.S.-China tit-for-tat trade measures. It is entirely unclear what, if any,
demands the United States may have in that review. We take comfort from the fact that the vast
majority of Mexican and Canadian U.S.-bound exports remain tariff-free under USMCA. We
interpret this, perhaps optimistically, as a recognition of the importance of the trade deal to U.S.
economic interests. If that interpretation is correct, we are hopeful that only minor tweaks (e.g.,
higher regional content requirements in autos) will be negotiated in the review, as was largely the
case when the North American Free Trade Agreement was renegotiated into USMCA.
The impact of U.S. trade, economic, and foreign policies extends well beyond the U.S.’s northern
and southern borders. The Chinese economy continues to struggle with weak domestic demand,
linked in part to an ongoing correction in the housing market – that is showing no signs of
turnaround – as well as a pullback in spending by regional/local governments resulting from the
central government’s hunt for financial stability and healthier growth drivers. We expect GDP
growth to slow from the 4.8% pace expected in 2025 to 4.4% in 2026. Note that official Chinese
data are always suspect, and it is likely that the true pace of growth is substantially below what is
published by Chinese statistical authorities.
The trade headwinds add to the challenges that Europe faces. Not only is competition from China
fierce, but also U.S. trade policy is engineering a slowdown of exports from the E.U. to the U.S.
along with an increase in imports from the U.S. to the European Union. Generally weak
governments in the major European economies have made it difficult for domestic policy to
respond forcefully to these challenges. Some countries have launched investment programs and
are ramping up defence spending, namely Germany, but the Eurozone’s domestic economy is
nevertheless expected to remain weak given the lags involved in the deployment of these
spending plans. Private consumption growth has been decelerating for several quarters. We
expect these trends – weakish domestic demand and declining net exports – to continue, leading
to a deceleration in economic activity from the 1.4% estimated for 2025 to 1.1% in 2026.
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