Navigating the U.S.-Canada Trade Shock – Key Insights & Defensive Positioning for Portfolios

 

Recent U.S. tariff increases have triggered the largest trade shock to Canada in nearly a century. On February 1, 2025, President Donald Trump announced a 25% tariff on Canadian imports, with a 10% tariff specifically on Canadian energy products. In retaliation, Canada has outlined plans to implement 25% tariffs on a range of U.S. goods totaling C$30 billion on Tuesday, followed by further tariffs on $125 billion worth of American products in 21 days' time. We are closely monitoring the evolving situation and assessing its impact on Canadian businesses and consumers.

 

Below are the key takeaways from RBC Economics’ latest analysis A U.S.-Canada trade shock now in play: first economic takeaways.

 

Key Takeaways:

 

• Economic Growth at Risk: If implemented long-term, these tariffs could disrupt Canadian GDP growth for up to three years and lead to unemployment rate increases of 2-3%.
• Canada’s Response: Canada has introduced retaliatory tariffs designed to impact the U.S. economy more than Canada’s, but these measures will still contribute to inflation and reduced growth at home.
• Manufacturing at the Forefront: Canada's manufacturing sector—70% of which trades with the U.S.—is particularly vulnerable, especially the auto industry, where cross-border supply chains could see significant disruptions.
• Raw Commodities Less Affected: Energy and other raw materials face lower tariffs since the U.S. has limited alternatives, meaning demand should remain relatively stable.
• Broader Economic Ripples: Job losses in affected industries could reduce consumer spending, impacting non-tariffed sectors like hospitality, retail, and services.

 

The duration of these tariffs will be critical - short-term disruptions may cause temporary slowdowns, but a prolonged conflict could have lasting structural consequences. However, factors such as a weaker Canadian dollar, targeted fiscal support, and a more accommodative monetary policy from the Bank of Canada may help soften the impact.

 

Defensive Positioning of your Portfolio

 

Throughout 2024, we have proactively adjusted the geographic allocation in your investment portfolios to strategically reduce Canadian exposure, positioning your portfolio more defensive as we anticipated a recession in Canada. Our philosophy has always been to invest in high quality companies with long term track records, strong balance sheets and proven management teams that adapt to changing economic conditions.

 

Along with geographic rebalancing, over the last 12 months we have proactively reduced equity exposure back to long term targets following a strong equity market. Holding an overweight in Fixed Income has provided further insulation to higher volatility.

 

In periods of heightened market volatility our investment models are designed to capture less downside risk than the index. Last Monday, while the S&P500 was down 1.5% and the NASDAQ was down 3%, our US model protected on all of the downside and was flat on the day. The next day, as the market recovered, we participated in almost all of the upside.

 

As we enter this volatile period for equity markets, maintaining a disciplined, long-term investment strategy will be more important than ever. Rather than reacting impulsively to market headlines, we believe in diversification across high quality companies with strong balance sheets, reliable cash flows and durable business models. We have positioned your portfolio to withstand market turbulence and navigate short term volatility.

 

We will continue to monitor developments and provide timely insights. As always, our team is here to discuss any questions you may have, please do not hesitate to contact us.