The recent announcement of U.S. tariffs on Canadian and Mexican imports is expected to have significant economic consequences. Tariffs drive up costs for businesses and consumers, fueling inflation and reducing overall economic activity. If these tariffs remain in place for a prolonged period of time, RBC Economics estimates that Canada’s GDP could contract by 3-4%, with the Bank of Canada warning of a potential 6% decline. The impact on employment is also concerning, as job losses could push unemployment up by 2-3%, particularly in the manufacturing sector, which represents 3% of Canada’s workforce. Meanwhile, in the U.S., E&Y is suggesting economic growth will slow to just 1.5%, down from a projected 2.8% in 2024. On a consumer level, Yale University estimates that these tariffs could cost the average American between $1,000 and $1,200 annually, reducing household spending and further weakening demand.
Beyond the economic effects, the political motivations behind these tariffs raise important questions. While Canada does have a trade deficit of $65 billion with the U.S., it ranks seventh globally, behind China, Mexico, the EU, and others (see diagram below). Furthermore, based on 2023 import statistics, the U.S. imported U$290MM/day, or U$160B of crude oil and petroleum products. In essence therefore, if not for oil, the U.S. would effectively have a trade surplus with Canada.
Given that 36 U.S. states count Canada as their largest export destination, it’s clear that trade between the two countries is deeply intertwined and mutually beneficial. This suggests that tariffs may be less about trade imbalances and more about broader U.S. concerns such as immigration, drug control, and defense spending. Many believe this is a negotiating tactic by the Trump administration to pressure Canada into making commitments beyond trade.
What now? How does Canada respond? Is it through countermeasures or seeking diplomatic resolution?
Our RBC Economics team is publishing some great material. Read their latest piece here - A U.S.-Canada trade shock now in play: first economic takeaways - RBC Thought Leadership
How we continue to manage your portfolio?
When it comes to your portfolio, we stay the course. For those of you who rely on your portfolio to meet your unique goals or fund your living expenses, we have planned for moments like now and allocated your money to a low-to-no-risk bucket that’s uncorrelated to the market (remember the three years of cash flow conversation?). And when managing your portfolio, our discipline and focus is designed to seek and own high-quality businesses, with high barriers to entry, and a growing return of capital to shareholders. Additionally, we are very price sensitive with this discipline and have pre-determined purchase and sale price targets for each company we own. When headlines such as these tariffs occur, we are able to capitalize on such opportunities and attractive valuations. These actions both significantly improves our risk/reward profile and ultimately the returns in the portfolio. As always, we remain committed to navigating these market and economic conditions with prudence and diligence, ensuring your investments are well-positioned to help you achieve your goals!
