Paul Punzo • February 5, 2025

In Conversation With: On Tariffs Between the U.S. and Canada

Although the proposed Canada-U.S. tariffs have been delayed for 30 days, we continue to monitor potential economic and market impacts on both countries.

The U.S. has threatened to impose a 25% tariff on Canadian imports, while Canada has announced plans to retaliate with tariffs on up to $155 billion worth of American goods. As expected, markets reacted negatively, fearing the economic consequences. The 30-day postponement follows negotiations that included agreements on enhanced border protections and a crackdown on fentanyl trafficking, among other issues.

Projected Economic Impact

Even with a weakening Canadian dollar, a 25% tariff on Canadian exports could reduce GDP by 2.5% to 3.0%. (5) However, given Canada’s current interest rate trends and public finances, the severity of any recession may prove limited.  The Bank of Canada modelled a scenario where mutual 25% tariffs would cause a 2.5% GDP decline in year one and an additional 1.5% drop in year two, raising concerns about a potential recession this year.

The Importance of Canada-U.S. Trade

Canada is the second-largest trading partner of the U.S., exporting $594 billion in goods to the U.S. in 2023. (3) Conversely, Canada is also the largest importer of American goods and services, spending $350 billion annually (1).  Justifying tariffs based on border security concerns is questionable, as less than 1% of fentanyl entering the U.S. comes from Canada (3) – especially when considering the economic partnership between the two nations supports 1.4 million American jobs and 2.3 million Canadian jobs (2).

Industry-Specific Impact of U.S. Tariffs on Canadian Exports

As illustrated below, certain industries will be hit harder than others, especially those with high U.S. export dependency. Given the share of U.S. exports, it is clear that the energy sector and automobile sectors will have the largest impact:


Impact By Industry

Total U.S. Exports 2023 % of Total Exports Tariff Cost @ 10% Tariff Cost @ 25%
Non Oilsands & Gas Extraction $143B 97% $14.3B
Automotive & Light Duty Vehicles $53B 95% $13.25B
Canadian Petroleum Refineries $23B 85% $13.1B
Crop & Animal Production $13.1B 32% $3.3B
Aluminum Processing $12.8B 93% $3.2B

Key Sectoral Impacts


Energy

The U.S. relies heavily on Canadian crude oil, which makes up one-third of Canada’s total exports to the U.S. While tariffs could initially cause price volatility, North America’s highly integrated energy markets limit alternative sourcing options.



Automotive

Canada’s auto industry depends on seamless cross-border supply chains. Tariffs would increase production costs, reduce demand, and hurt competitiveness in both countries.

Wider Economic Consequences

The broader economic impact depends on availability of substitutes and how easily businesses and consumers can find non-tariffed replacements. If alternative suppliers aren’t available, tariffs will likely drive higher inflation. The longer tariffs remain in place, the greater the potential disruption.  To mitigate economic harm, the Canadian government is introducing a remission process to provide exceptional relief from tariffs where necessary. (4)

Stock Market Considerations

It is crucial to distinguish the Canadian economy from the Canadian stock market:

  • Many large Canadian companies are multinational and do not rely solely on domestic revenues.
  • Over 50% of S&P/TSX revenues come from outside Canada, with over a quarter generated in the U.S.
Financial and technology sectors (which make up 33% and 10% of the S&P/TSX index, respectively) should be less affected, as tariffs primarily target goods rather than services.

Services includes Communication Services, Financials, Health Care, Information Technology, and select industries in the Consumer Discretionary, Consumer Staples, and Industrial sectors.

Source - RBC Wealth Management FactSet data as of 12/31/24

Given a lower 10% tariff on energy, U.S. demand for Canadian oil should remain relatively stable, helped by a weaker Canadian dollar, producer price cuts, and U.S. refinery cost absorption.

Investment Strategy Amid Tariff Volatility

At IPC Private Wealth, our portfolios are globally diversified to manage risks, including those posed by tariffs. Our macro-economic analysis informs our asset allocation and positioning, ensuring we remain adaptable.


At the individual stock level, our sub-advisors focus on opportunities that arise when tariffs create market distortions. While tariffs may cause economic pain, some sectors and companies will benefit from these shifts.   Historically, equity markets have recovered from major external shocks, including the 2008 financial crisis, the COVID-19 pandemic, and even world wars. Short-term volatility is expected, but it’s critical to avoid emotional decision-making. A well-diversified portfolio—including multiple asset classes and investment managers—remains the best defense against market instability.

You can hear more about Paul's take on tariffs between the U.S. and Canada in our 4-minute video.

Sources:

1. TD Economics: Setting the Record Straight on Canada-U.S. Trade

2. Chamber of commerce “The Cost of Canada-US Trade Disruption on Full Display with New Trade Tracker”

3. Toronto Star: These industries would be hit hardest by Trump’s 25 per cent tariffs

4. Canada.ca: Canada announces $155 tariff package in response to unjustified U.S. tariffs

5. Capital Economics “Trump hits Canada, China and Mexico with tariffs”

Disclaimers:

The views expressed in this commentary are those of Canada Life Investment Management as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances. The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it. 


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