Hello and welcome to our latest video #MacroMemo. There's lots to discuss. As always, we'll cover the latest tariff developments, including an extension of the July 9th reciprocal tariff deadline. We'll look at Vietnam's trade deal with the U.S. and how Canada is faring in its negotiations. We'll discuss some other U.S. policy developments, including the tax bill that was just passed.

We'll look at a new scorecard we've developed to gauge the relative influence of the U.S. and China over other countries. We'll also give a quick update on the situation in the Middle East, and we'll cover some recent U.S. and Canadian economic data. So that's the agenda. Let's dive in.

We'll start with the U.S. trade policy. I should note that I'm recording this on the morning of July 8th, and the Trump administration is in the midst of sending out tariff letters to many of its trading partners.

We've seen some of them, but there will likely be more details out by the time you're watching this. The key thing to know, though, is that the 90-day reciprocal tariff pause that was set to expire on July 9th has been extended to August 1^st. To keep pressure on its trading partners, the White House is sending out those letters detailing the tariff rates that individual countries will have to pay if they can't come to an agreement within the next three weeks.

So far, those tariff rates have ranged from 25-40% and are generally close to the reciprocal tariff rates that were announced on April 2nd and subsequently delayed. So this really looks like a short extension of that deadline in an effort to speed up negotiations. While the Trump administration is optimistic that more deals are forthcoming, the quick turnaround time has markets on edge.

To be clear, fully imposing those reciprocal tariff rates would result in a higher effective tariff rate on U.S. imports than we've been assuming. But it's encouraging that Vietnam, which was assigned one of the highest reciprocal tariff rates on April 2nd, was able to negotiate a lower 20% tariff rate. That suggests there's scope for other countries to reduce these new tariff rates as well.

This also represents the latest in a series of deadline extensions by the Trump administration, which raises the prospect of further delays beyond August 1st. Unfortunately, that also means trade policy uncertainty is set to persist.

Okay, looking at that Vietnam deal that was announced in early July, the country agreed to a 20% tariff rate on its exports to the U.S. and will allow imports from the U.S. to enter tariff free. Goods that are transshipped through Vietnam will face a higher 40% tariff rate.

This is an important trade deal because Vietnam is the sixth largest exporter to the U.S., and its economy is highly dependent on trade. The 20% blanket tariff it agreed to is double the 10% baseline tariff rate it was previously facing. But it's quite a bit below the 46% reciprocal rate that was threatened in April.

Vietnam is the second country to strike a trade deal with the U.S. after the UK. And the two agreements give us a sense of what the framework might look like for other trading partners. Recall, the UK agreed to a 10% baseline tariff rate and secured some relief from sectoral tariffs. That might be a template for other developed market economies, particularly those that don't have significant trade imbalances with the U.S.

Meanwhile, Vietnam's 20% tariff rate might be closer to the rate applied to other countries with large trade surpluses and low manufacturing costs. Canada is in something of a different situation. It does not face a 10% baseline tariff, and despite being heavily impacted by sectoral tariffs, it is currently paying one of the lowest effective tariff rates among major trading partners.

July 9th was never a major deadline for Canada. Yet Prime Minister Carney has set a relatively short 30-day window to reach an interim trade deal with the U.S. by July 21st. That timeline seems to suggest some optimism on the part of Canadian negotiators, and indeed, the government has made progress addressing a number of U.S. irritants. Canada committed to increasing its military spending alongside other NATO members, which could include additional procurement from the U.S. and possibly participation in the U.S. Golden Dome missile defense system.

Canada canceled its digital services tax just as the first round of revenue was set to be collected, which is something we've been expecting as part of negotiations. Canada has taken steps to prevent dumping of steel and aluminum and is increasing border security as well. Those steps could lay the foundation for a deal, although it appears less likely Canada will avoid tariffs altogether.

The government reportedly asked the leaders of various industries what level of tariffs they could endure, so some form of sectoral tariffs remains likely.

Okay, onto some other U.S. policy developments, just to take a step back for a second. The expectation heading into Trump's second term was that, as in his first term, he would implement some of the more growth friendly aspects of his agenda, like tax cuts and deregulation, before turning to the less market- friendly policies like tariffs.

So far, he has done the opposite, focusing on aggressive tariff policy very early on. But the administration is now making some progress on some of those more growth-friendly policies. Despite some doubts, Congress met Trump's self-imposed deadline to have a tax bill passed and signed into law on July 4th. The "One Big Beautiful Bill" extends tax cuts from Trump's first term that were set to expire at the end of the year.

It also implements some new, narrower personal income tax cuts like no tax on tips and overtime, and it offers accelerated depreciation on capital investment that could provide a nice boost to CapEx. More money is allocated to border security in the military, while spending on green initiatives is reduced. Cuts to food stamps and Medicaid also help to trim overall spending.

But those entitlement cuts have made the bill somewhat unpopular among voters. Even with those savings, the bill's overall cost remained substantial between 2.8 and $4 trillion over the next 10 years. That's problematic for a country that already has a high deficit and high debt load and is facing rising costs to service that debt. You might recall that according to our fiscal monitor, the U.S. was already in the most challenging fiscal position among major economies prior to this tax bill.

It is worth noting that cost estimates of the bill do not account for new tariff revenue, which effectively amounts to a tax increase and could help pay for much of the bill's cost. The bill also raises the debt ceiling by $5 trillion, which means the U.S. government will no longer be flirting with technical default over the summer. Treasury can now replenish its general account by issuing new debt, which will drain some liquidity from the financial system.

On net, though, the U.S. budget bill is somewhat stimulative, with tax cuts that are front loaded and some spending cuts being delayed. That should allow the U.S. economy to grow a bit faster in 2026 than it otherwise would have. We still think the net effect of Trump's policies will be a drag on growth, but not to the extent tariffs alone would weigh on the economy.

One last note on the big beautiful bill: Section 8.99, which was referred to as the revenge tax, was removed from the final legislation. That provision threatened to increase taxes on foreign companies and investors from countries with discriminatory foreign taxes. But it was dropped after other countries indicated American companies would not be subject to those taxes.

Okay, onto a new scorecard we've developed that looks at the relative influence that the U.S. and China have on other countries. The world is becoming increasingly multipolar with growing trade and geopolitical tensions between the two superpowers. Third-party countries are facing pressure to take sides, with the U.S. in particular looking to reduce China's role in its trading partners supply chain.

Trump's latest threat of an additional 10% tariff on countries that align themselves with what he sees as the anti-American policies of the BRICs group is part of that strategy. So for the top 50 economies, we looked at 15 indicators that spanned trade, investment, people and policy connections with the U.S. and China. On a GDP-weighted average basis, we find similar overall ties with the two superpowers. But there's significant differentiation across countries and within the areas we focused on.

Unsurprisingly, there is a regional skew, with North American economies tilting slightly more toward the U.S. and many South and Southeast Asian countries aligned with China. But some, like South Korea and Singapore, have strong ties with both countries and have a particularly fine line to walk in managing those relationships. On average, nations tend to align more with China on trade. They’re particularly dependent on China for imports of strategic products, for which there are few alternative suppliers.

This dependance has been on full display recently, with China throttling exports of rare earth metals and magnets that are essential inputs for some global manufacturers. It's the opposite case with investment, where other countries tend to have much closer ties with the U.S. The U.S. is both the largest source of and destination for foreign direct investment. It also attracts significant portfolio investment.

Its treasury market is the largest and most liquid in the world, and its equity market has consistently outperformed others. Our people score tilts slightly toward the U.S., given its more open immigration system and generally more positive views held by residents of other countries – although that is starting to change.

On diplomacy, it's roughly split. Other countries tend to be more reliant on the U.S. for security.

China has more extensive trade agreements with other nations, and in some cases aligns more on international policy. On average, relationships have shifted slightly toward China over the past decade. Looking forward, based on an assumption that the U.S. remains more inward-looking than in the past, that China's economy continues to outgrow the U.S., and that China incrementally opens its markets to the rest of the world, there is a good chance that China continues to make inroads with many countries.

However, China is unlikely to successfully woo all nations given concerns about national security. Unfair trade practices and a desire to avoid being too reliant on any one country. Ideally, most nations would maintain full access to both the U.S. and China. But it looks like it is increasingly likely that it will be difficult to achieve that as tensions between the two superpowers mount.

Countries under one sphere of influence may increasingly encounter frictions when attempting to engage with countries in the other's sphere. This fracture may incrementally slow global growth and add to inflation in the long.

Okay. Sticking with geopolitics for a moment longer, the conflict between Israel and Iran that escalated significantly in June and was briefly joined by the U.S. has now de-escalated and a ceasefire appears to be holding.

As such, oil prices, which jumped by about $10 a barrel in mid-June, are now back close to levels seen prior to the escalation. Prices remain around the lowest levels seen since Russia's invasion of Ukraine, and that's providing a disinflationary and positive force, effectively working in the opposite direction of tariffs, although not by the same magnitude. There is uncertainty around the extent to which Israeli and U.S. air strikes disrupted Iran's nuclear program, and whether a more sustainable solution can be reached via a new U.S.-Iran nuclear deal.

For now, betting markets are putting roughly the same odds on a new nuclear deal as they are on Israel attacking Iran again before the end of the year.

Quickly, on defense spending, NATO countries have agreed to increase their defense spending to 5% of GDP by 2035, up from a 2% target currently. The new target includes a 3.5% commitment on classically defined military spending, and another 1.5% on defense related spending like cyber security, critical infrastructure and defense innovation.

These new spending commitments will require difficult political decisions to cut spending, raise taxes, or increase what in many cases are already large budget deficits. Deficit finance defense spending could have a somewhat stimulative effect on the economy, but that has to be set against any drag from higher borrowing costs associated with larger budget shortfalls.

Okay, briefly onto some recent economic data.

The U.S. economy was showing tentative signs of softness in the past month or two, but high frequency indicators seem to show a slight bounce more recently. We continue to think the U.S. economy will grow at a slower pace over the second half of the year, but the latest data has been a bit better and we'll have to see if that persists.

Canada's economy has been showing more notable signs of slowing for several months now. Economic activity declined in back-to-back months in April and May for the first time since 2022. Canada's unemployment rate continues to drift higher, reaching 7% in May. The country's main job survey shows rising employment through the first five months of the year, although we think some methodology quirks are causing that to overstate the underlying pace of job gains.

Canada's population growth ground to a halt in Q1, as the government's more restrictive immigration policies took hold, but the jobs numbers can be slow to account for such a shift. We think the separate payroll employment report, which unfortunately lags the other jobs data, is painting a more accurate picture and it suggests paid employment declined through April. Disappointing economic data leaves the door open to the Bank of Canada resuming modest rate cuts in the second half of the year, so long as inflation continues to cooperate as it did in May.

That said, the prospect of increased defense spending in the near term as the government aims to reach NATO's current 2% target this year, as well as personal income tax cuts that took effect on July 1st might lessen the need for more stimulative monetary policy.

Okay, that's it for this week. I hope you found it useful. Please join us again next time.