CIBC maintains cautious optimism amid USMCA volatility

Investing.com -- CIBC economist Avery Shenfeld argues that Canadian exports are likely to retain their current duty-free status despite escalating trade rhetoric from Washington, according to a recent note. This assessment serves as the foundation for the bank’s latest economic outlook, which anticipates the bulk of US-bound goods will avoid new sectoral tariffs.

Shenfeld suggests that much of the current tension mirrors the high-stakes negotiations seen during the initial drafting of the USMCA. "We’re setting aside that White House rhetoric, because we’ve seen that movie before," Shenfeld noted regarding the President’s public complaints about Canadian trade practices.

The legal structure of the existing agreement provides several paths that align with a stable "base case" for the Canadian economy. Shenfeld observes that even if the tripartite review fails to reach a definitive conclusion, the deal would likely remain in place until its 2036 sunset date.

Political pressure within the United States may also prevent the administration from taking a scorched-earth approach to continental trade. "Greer, and others in the administration, have also heard a lot of support for a trade deal extension from US business groups," Shenfeld wrote in his analysis.

Market behavior suggests that investors are currently aligned with CIBC’s view rather than pricing in a significant trade war. Shenfeld points out that if a high-tariff outcome were truly expected, markets would not be pricing in an unchanged Canadian overnight rate for the remainder of the year.

Despite this optimism, the economist warns that persistent threats of withdrawal continue to dampen long-term business confidence across the border. Shenfeld concludes that while export growth may continue, "remaining doubts will be a headwind for goods sector capital spending" intended to expand Canadian industrial capacity.

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