Tariffs and Turbulence
Tariffs and Turbulence
Less than a dozen days after taking office, the returning President of our “Greatest Ally” turned its back on Canada by implementing a 25% tariff on all products from the Great White North—except for energy resources, which will face only a 10% tariff.
Effective Tuesday, Feb 4, 2025:
- All goods sent from Canada (or Mexico) to the United States, excluding oil and gas, will incur a 25% tariff payable to the U.S.
- A 10% tariff will apply to oil, gas, and imports from China.
In response, Canada has introduced its own set of retaliatory tariffs. Starting Feb 4, a 25% tariff will be imposed on a limited number of U.S. trade goods entering Canada. Additionally, 21 days later, a broader range of targeted goods will be subject to tariffs. This delay is intended to allow Canadian industries time to adjust. Specifically, the following products will be affected:
- Vehicles, trucks, RVs, boats, and buses
- Fruits and vegetables
- Dairy, pork, and beef
Exporters will either have to absorb these costs—reducing their margins—or pass them on to consumers. It is widely expected that these changes will result in a near-term 25% price increase on affected goods.
At a time when the Canadian economy is faltering and U.S. inflation rates remain high, these measures risk creating a self-inflicted wound that could jeopardize the prosperity of both nations.
Why Would Our Allies Engage in Such Hostility?
On the campaign trail, Trump promised to bring manufacturing back to the U.S. He now believes that the election results grant him the mandate to implement policies that would achieve that goal. His rationale was simple: if foreign manufacturing becomes more expensive in the U.S., local producers would have an opportunity to compete.
In theory, this sounds like it might produce the intended results. Regrettably, economic history points to a different unintended consequence.
In an attempt to rescue the U.S. economy during the Great Depression, the Smoot-Hawley Tariff act of 1930 introduced steep tariffs on more than 20,000 imports to the U.S. This was met with retaliatory tariffs from affected countries and ultimately deepened the depression1.
More recently, the George H.W. Bush administration sought to revive the steel industry in the early 2000s by imposing tariffs on imported steel. The long-term benefits for the steel industry never materialized2. The tariffs led to a spike in domestic steel prices affecting downline industries like the automative sector and manufacturing, rendering them less competitive worldwide, ultimately damaging the U.S.
Economic history suggests that tariffs often backfire when met with retaliatory measures. Thus, it appears that the current tariffs may be more politically motivated—designed to score points with supporters and to negotiate concessions—rather than a sustainable economic strategy.
Is It Legal? (Sources: 3, 4)
According to the USMCA—the very trade agreement Trump negotiated, and then touted as a significant improvement over NAFTA—protectionist tariffs are not allowed. To circumvent this, the 47th President has invoked the National Emergencies Act (NEA), which grants broad trade authority. Originally intended for use in times of war, Trump’s legal team is now extending this authority to issues like the war on drugs and illegal immigration. This also explains the connection to fentanyl in his X (formerly Twitter) post announcing the tariffs.
These legal maneuvers are particularly frustrating for Canadians:
- Less than 1% of illegal immigration into the U.S. comes via the Canadian border.
- Only about 50 lbs of fentanyl (0.2% of total seizures) have been intercepted at the northern border.
The legal vulnerability lies in linking national security threats to tariffs on Canadian goods such as grain, oil, and gas. Although Congress theoretically has the power to overturn this decision, the political climate and recent strong election results make immediate intervention unlikely. Canada and Mexico might also challenge the tariffs at the World Trade Organization, but the WTO’s diminished enforcement powers in the U.S. limit this option.
Impact on the Canadian Economy
Most Canadian exporters are expected to offset the new costs by raising their prices. This may reduce the demand for Canadian products in the United States, making them appear more expensive compared to European or, to Trump’s delight, U.S.-manufactured goods. The resulting decline in demand could lead to reduced economic activity as manufacturers cut hours or delay expansion plans.
The tariffs will affect all provinces:
- Atlantic provinces: Lobsters
- Quebec: Power
- Ontario: Vehicles
- Prairies: Grain
- Alberta: Oil & gas
- British Columbia: Softwood
- Territories: Minerals
Each region will need to find ways to remain competitive in this new environment.
Impact on the U.S. Economy
According to the Department of Finance of Canada:
- $2.5 billion worth of goods and services cross the US-Canada border daily.
- The U.S. sells more goods to Canada than to any other country; Canada buys more goods than China, Japan, France, and the United Kingdom combined.
- Canadian companies employ more than 900,000 workers in the United States.
- Roughly 70% of Canadian exports to the U.S. are used as inputs in production.
- Canada accounts for 73% of U.S. exports of trucks and 36% of fruits and vegetables.
The economic ties between Canada and the United States are undeniably strong. While the U.S. may feel an impact, its vast domestic market and trade opportunities are likely to soften the blow compared to the impact on Canada’s economy.
Impact on the Stock Markets
Despite Trump’s repeated claim that “tariff is the most beautiful word in the dictionary” and his executive order on January 20, the markets had not fully priced in this new reality by Friday. Consequently, we expect a market reaction at Monday’s open.
For months, we have discussed with clients that U.S. equity markets, trading at historically high valuations, were due for a reversion to the mean—a potential 20-30% drop in stock prices. Could Trade War 2.0 prompt investors to demand higher returns for increased risks, especially in technology stocks?
Across the border, Canadian valuations may also see a pullback. We expect resource companies and manufacturers to open lower as investors process the implications of U.S. sanctions and Canada’s retaliatory tariffs.
Furthermore, the Canadian dollar is likely to depreciate, especially if monetary policies diverge:
- The Central Bank of Canada may lower interest rates to support the economy.
- The U.S. Federal Reserve may hold or increase rates to combat inflation.
This divergence could prompt hedge funds to borrow in Canada and deposit in the U.S., adding pressure to the CAD. One pundit even suggested this scenario might push the Canadian dollar below $0.60. Book your travel plans accordingly!
How Might This Impact You?
Investors generally dislike uncertainty almost as much as declines in portfolio values. Following an exceptional two-year run in stocks, it is essential to take a long-term view and avoid the “anchoring” bias—where performance is measured solely from a recent high point. For example, if a $100,000 investment grows to $150,000 over three years (a 50% total return or 14% per year, compounded) and then falls to $130,000 in a down year, many focus on the $20,000 loss (~13%) rather than the overall annualized return of 7% over four years.
Be mindful of your emotions amid market volatility. Avoid declaring, “This time it’s different,” as such statements often lead to panic selling in the face of a potentially man-made economic crisis.
Beyond portfolio impacts, expect higher prices on everyday goods. Consider delaying large-ticket purchases like vehicles if prices spike. Aim to buy Canadian products that are not affected by the tariffs, and be prepared for changes to your consumption habits—such as Ontario’s promise to remove U.S. liquor from LCBO shelves.
Finally, it may be wise to revisit your retirement plan assumptions. Consider projecting conservative rates of return (around +4% per year) and inflation figures (2.5%-3% per year) along with an updated budget to determine whether any adjustments to your spending or saving strategies are needed.
What We Are Doing About It
We anticipated that the Canadian tariffs might be largely political posturing rather than a long-term economic strategy. Accordingly, we did not bet all on one outcome. Instead, we made several tactical moves in August and September, 2024, including:
- Increased cash positions: To provide safety and dry powder for bargain hunting.
- Rebalanced allocations: Shifted focus toward mid-sized, domestically focused U.S. companies and reduced exposure to overvalued technology companies.
- Adjusted fixed-income exposure: Eliminated allocations to U.S. government-issued debt in favor of physical gold as protection against a crisis of confidence in U.S. leadership.
- Maintained international holdings: To benefit from a drop in the Canadian dollar and protect client capital.
- Boosted infrastructure investments: A historically resilient source of returns.
While we did not predict this outcome, our Tactical and Defensive portfolios have been positioned to manage the impact. Meanwhile, our Growth portfolio focuses on high-profitability companies that may better withstand these tariffs.
What’s Next?
Understandably, Canadians are frustrated and angry with the actions of our allies. Beyond sharing a border, we have a shared history of partnership and cooperation. It is natural to feel betrayed and the need to strike back.
Trump’s executive order also hinted that any retaliatory tariffs would be met with further escalation beyond the initial 25%. When a bully is cornered, will they cower or come out swinging? Only time will tell.
Our hope is that Canada responds to this threat to its economy and sovereignty with unity and strong global leadership. History shows that Canadian strength is best demonstrated through building relationships and common ground rather than through retaliatory measures. Our leaders must look beyond immediate tit-for-tat actions to protect our long-term interests. Key actions might include:
- Supporting domestic industries: By reducing barriers to inter-provincial trade.
- Subsidizing value-added projects: Especially in our mineral extraction industries.
- Strengthening global trade partnerships: With Europe and Asia, improving infrastructure to shift goods east-to-west rather than relying solely on north-south corridors.
- Revisiting tax and government spending to foster entrepreneurship
Canada is at a crossroads regarding its partnership with our southern neighbours. American jokes about annexing Canada should not be taken lightly, nor should the arbitrary use of legal authority for political gain. Let’s hope our Canadian leaders rise to the challenge.
Through calm waters and stormy seas, our hand remains steady on the rudder, guiding you toward safe and prosperous shores. Thank you for your continued trust in our stewardship.
Update
As of last night, the newly announced tariffs have been paused for 30 days following commitments from Canada and Mexico to reinforce border security measures. While this temporary reprieve offers some breathing room, it remains unclear whether it marks the beginning of a broader resolution or merely a tactical delay. Trump is already touting this as a victory, framing it as proof that his hardline stance is delivering results on border security—his ultimate objective all along. For now, the economic storm has been pushed slightly further out to sea, but we remain vigilant in navigating these shifting tides.
Sources
1 Irwin, D.A. (1998). "Peddling Protectionism: Smoot-Hawley and the Great Depression." Princeton University Press.
2 Smith, J. D., & Lee, A. R. (2016). Reassessing the long-term impacts of the 2002 U.S. steel tariffs (NBER Working Paper No. 22456). National Bureau of Economic Research. https://doi.org/10.3386/w22456
3 Maruyama, W., Galvin, L., & Reinsch, W. A. (2024, October 10). Making tariffs great again: Does President Trump have legal authority to implement new tariffs? Center for Strategic and International Studies. https://www.csis.org/analysis/making-tariffs-great-again-does-president-trump-have-legal-authority-implement-new-tariffs
4 Al Jazeera. (2025, February 2). How have Canada, China, and Mexico responded to Trump's tariffs? Al Jazeera. https://www.aljazeera.com/news/2025/2/2/how-have-canada-china-and-mexico-responded-to-trumps-tariffs
This publication is for informational purposes only and shall not be construed to constitute any form of advice. The views expressed are those of the author alone. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.
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