- It seems increasingly probable that US President Donald Trump will announce a 25% tariff on Canadian goods, effective Feb. 1.
- Analysts warn of a severe impact on trade-sensitive industries, though the auto and energy sectors may be spared.
- A trade war could weaken the Canadian dollar further, potentially offsetting the inflationary effects of tariffs.
As market participants anxiously await US President Donald Trump to set punitive tariffs on Canada, analysts advise investors to separate the noise from the news and focus on the key aspects of any such announcement. Trump’s proposed 25% tariff on Canadian exports could come into effect as early as Feb. 1. They may be intended to remove the northern neighbor’s claimed USD 250 billion trade deficit with Canada.
Most economists believe a worst-case scenario will be avoided, but such an event could devastate the Canadian economy and its competitiveness. There would also be serious implications for Canadian investors tapped into the industries and sectors most vulnerable to any crowbar in cross-border trade.
What to Watch
BMO Chief Investment Officer Sadiq Adatia explains that the details of any tariff are critical: “It will depend on the size of the tariff, and whether it is across the board or more targeted.” Key factors include the availability of substitutes, elasticity of demand, the reaction of the currency, and how much exporters absorb versus how much they pass costs onto customers. It’s widely believed that trade-sensitive industries will be the most vulnerable. Adatia identifies primary metals, food and beverages, and chemicals as areas “in the crossfire.”
Industries at Risk
Industries where the United States can easily find domestic or alternative foreign suppliers are at greater risk. Colin White, CEO at Verecan Group of Companies, explains: “That’s why some sectors—like auto manufacturing, where parts constantly cross the border—could avoid harsh tariffs. The disruption would hurt US consumers and workers too.” Industries such as agriculture and poultry may be at greater risk “if the US believes it can meet its demand internally.”
Energy and autos would suffer the most from blanket tariffs, but they’re also likely to avoid tariffs. “Auto parts travel across borders multiple times before being included in a finished vehicle, and roughly 70% of all auto parts manufactured in Michigan go to Canada and Mexico,” explains Nicola Wealth portfolio manager Ben Jang. Decades of free trade have resulted in highly integrated cross-border supply chains, with the auto industry being a prime example of such integration. Tariffs on the Canadian auto sector would have a reciprocal impact on the auto industry south of the border.
Similarly, Jang says that Canadian energy accounts for roughly 60% of US imports, since American refineries are equipped to process heavy Canadian crude, not the light crude the US generally produces. Taxing the Canadian energy sector could “have a large inflationary impact on the US consumer.” Meanwhile, Jang notes that food, chemicals, machinery, aerospace, and timber would take a hit from tariffs.
Other Potential Exemptions
Some sectors related to national security could be spared from tariffs, particularly those crucial to the US. Jang says these would include “Uranium used for power plants and weapons and potash used for fertilizers,” of which Canadian production accounts for a large percentage of imports in the US. Similarly, critical minerals like cobalt and graphite (essential for lithium-ion batteries) from Canada help reduce US reliance on countries like China and the Democratic Republic of the Congo. Jang remains hopeful that any tariffs on Canadian goods would be calibrated to minimize unintended consequences for American businesses and consumers.
White hopes for the best, but insists investors take Trump’s tariff threat with a grain of salt. “They often involve a lot of dramatic posturing, like a professional wrestling match, rather than solid economic policy,” he argues. “Investors shouldn’t overreact to grandstanding, and should instead stay focused on the fact that the global economy will find a way forward.”
Potential Benefits for Investors
Although a trade war is never ideal and tit-for-tat tariffs could escalate tensions, there is a silver lining for Canadian investors. Some of the inflationary effects could be offset by the inevitable depreciation of the Canadian dollar. “A weaker loonie would dampen the impact, as it would help keep prices lower,” says Adatia. He adds that Canadian investors “should look to the US for their equity investments to benefit not only from the strong US economy but a stronger USD.”
Additionally, homebuyers could receive a welcome break from high mortgage rates. “The Bank of Canada could cut interest rates further if they feel the economy is in trouble,” adds Adatia. For equity investors, it’s crucial to assess whether any tariffs will be permanent. “If not, there could be a potential buying opportunity on any dips,” he says. “If more permanent, valuations need to be adjusted to reflect the higher costs.”
White isn’t overly concerned about tariffs, regardless of their size. “If your investments are properly diversified, new tariffs shouldn’t be a concern,” he says. “Tariffs come and go, and well-allocated portfolios can weather these ups and downs over time.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
