08:04 AM EDT, 04/03/2025 (MT Newswires) -- For now there are no changes for Canada relative to prior United States tariffs announcements, as the country is exempt from the reciprocal tariffs and the baseline 10% rate announced for the rest of the world on Wednsday, said TD.

Instead, Canada will continue to be subject to the 25% "fentanyl/illegal immigration" tariff, with 10% on energy and carve-outs for USMCA-compliant goods. It's estimated that around 40% of the dollar value of goods travelling across the border are declared as USMCA compliant, although more firms may make the effort to become compliant, noted the bank.

It's estimated that 80-90% of the value of exports could become USMCA compliant.

If the U.S. decides that progress has been made on fentanyl/illegal immigration, the 25% non-compliant tariff will be cut to 12% -- and energy/potash would be exempt altogether.

Past tariff announcements have already begun snaking through supply chains, such as 25% on steel and aluminum. Then there's the 25% tariff on finished vehicle imports that takes effect on Thursday. As it stands, the effective tariff on Canada is now around 10%, up from less than 2% before President Donald Trump came into office, pointed out TD.

This is close to the 12.5% the bank assumed in its baseline forecast last month. USMCA-compliant auto parts and lumber are still caught in the crosshairs without a specific timeline, recalled the bank.

Canada previously retaliated with about $60 billion in tariffs on U.S. goods, with the next tranche set at $125 billion based on the Liberal government's guidance in February. With parliamentary elections on April 28, how the incoming government will respond remains to be seen, added TD.

The bank's baseline assumed all levels of Canadian government would spend an extra 1% of gross domestic product in 2025 to support growth. That now appears to be on the low end.

Based on the provincial budgets released to date, stimulus measures have already totaled 0.3% of GDP. Ontario is expected to release its budget sometime in mid-April, potentially bringing the cumulative fiscal spend to 1% of GDP. Adding federal fiscal measures could double this figure.

Although this will take the sting out of tariffs, it won't prevent near-term economic stagnation as companies and labor markets absorb the policy shock, according to TD. Canada will need to brace for a long period of economic restructuring. Even if the tariffs are removed or lessened in short order, Canadians cannot "unsee" the past three months. Returning to a place of commitment and trust would be unrealistic.

Inflation is expected to reach above 3% by the summer, with any easing achieved through lower tariff rates. For the Bank of Canada, it will be closely monitoring two areas: inflation expectations and governments' response.

As the central bank has noted, it has limited capacity to push against a policy shock of this nature. Don't expect a substantial drop in interest rates, but there is room for at least 50 basis points of cuts to ease financing costs, said TD.