Below are my notes from the March 13th 2025 webinar featuring Frances Donald, Chief Economist, RBC, who discussed the impact of the U.S. trade tariffs on the Canadian economy.
Frances discussed the nuances and potential near-and long-term consequences that the tariffs enacted by the Trump administration may have for households, corporations, and policymakers across Canada.
Economic Resilience & Initial Impact
Viewing Tariffs as a ‘Virus’:
• Canada’s economy is more vulnerable—like a weaker immune system—making it more susceptible to downturns.
• The U.S. economy, in contrast, is better positioned—akin to a stronger immune system—making it more resilient against tariffs.
Anticipation Effect:
• Even before tariffs are implemented, uncertainty is already impacting businesses.
• Canadian businesses are delaying investments and hiring due to economic uncertainty.
Policy Response & Economic Support
Bank of Canada (BoC) Outlook:
• Expected to cut interest rates, with at least two more reductions likely.
• Further cuts possible if tariffs persist.
Government Support Measures:
• Targeted aid needed for specific sectors and vulnerable individuals.
Currency Impact:
• A weaker Canadian dollar could offset some tariff effects by making Canadian goods more attractive to U.S. buyers.
U.S. Perspective
Employment & Inflation Concerns:
• Job losses remain minimal, but inflation is a key concern.
• Washington is focused on supporting the lower and middle class, accepting short- to medium-term market pain for long-term policy goals.
K-Shaped Economic Impact:
• Top 10% of Americans (who own 83% of stocks) remain largely unaffected.
• Lower 90% face greater challenges, with inflation eroding purchasing power.
Recession Risks:
• Prolonged uncertainty has increased economists’ estimates of an economic downturn.
Recession Risk & Tariff Duration
Understanding Recessions:
• Defined as a six-month decline in a country’s total economic output (GDP).
Potential Impact on Canada:
• If broad-based tariffs remain for 6–9 months, Canada could enter a recession lasting around a year.
• However, long-term tariffs may push Canada to build a stronger, more self-sufficient economy.
Tariff Objectives – A Shifting Narrative
Evolving Justifications:
• Initially linked to fentanyl—yet Canada accounts for less than 1% of the supply.
• Later tied to illegal immigration—despite Canada having just 1/10th of Mexico’s figures.
• Now a mix of economic and strategic concerns.
Unstated but Likely U.S. Objectives:
• Access to critical minerals (key for nuclear energy, found mainly in Canada, China, and Africa).
• Cheap, reliable renewable energy to power growing AI and aluminum production needs.
• Freshwater resources.
• National security interests, particularly in the Arctic.
Revenue Considerations:
• With U.S. debt levels at an all-time high approaching 2026, tariffs serve as a revenue source.
• Even widespread tariffs would only offset about one-third of the U.S. budget deficit caused by recently enacted tax cuts.
Demographic & Labor Market Challenges in the U.S.
Key Labor Market Realities:
• 40% of Americans are not in the workforce—labor shortages are about supply, not job availability.
• Prime-age workforce participation (ages 25-55) is at a record high.
• Unemployment remains low at 4%.
Two Solutions to Labor Shortages:
• Increase birth rates (but this takes 25+ years to have an impact).
• Boost immigration (though current policies are moving in the opposite direction).
Canada’s Strategic Position
Resource Strengths:
• Canada possesses key resources that the U.S. needs, including:
- Potash, canola oil, critical minerals, natural gas, and renewable energy.
Geographic location:
• Canada’s geographic position—bordering the U.S. and three oceans—only has one logical trade partner.
• Easier trade relations with the U.S. compared to other global markets.
The Case for Free Trade
Why It Makes Sense:
• Canada holds resources the U.S. requires, making free trade mutually beneficial.
• Under NAFTA, nearly 97% of trade was duty-free—until the U.S. withdrew.
Implications:
• The shifting tariff rationale suggests that objectives may be driven more by strategic and political factors than pure economics.
Canada’s Opportunity
Monetary Policy as a Broad Tool:
• Interest rate cuts benefit the entire economy.
• However, helping the top 10% is not the goal—resources should be allocated to those most impacted.
BoC & IMF Recommendations:
• The Bank of Canada urges governments to provide targeted support to affected sectors and households.
• The IMF estimates that Canada’s internal trade barriers equate to a 21% tariff on domestic trade.
Unlocking Economic Potential:
• Removing interprovincial trade barriers could boost Canada’s economy by up to $200 billion annually.
• Addressing domestic inefficiencies could help offset U.S. tariffs.
Long-Term Optimism:
• Regardless of political leadership, Canada’s economic outlook over the next 3–5 years remains positive.
Investment & Market Considerations
Market Response to Uncertainty:
• Markets adapt well to uncertainty, but prolonged unpredictability poses challenges.
• Despite being primary tariff targets, Canadian and Asian markets have held up better than the U.S.
Revised Growth Outlook:
• Economic forecasts have been adjusted downward due to tariff pressures.
Investment Strategy Recommendations:
• Stay invested, but prepare for volatility.
• Reassess asset allocation (stocks vs. bonds) to ensure alignment with long-term risk tolerance.
• Maintain liquidity—holding some cash and low-volatility assets can help meet income needs, particularly for risk-averse investors.
For those who made it to the end, thank you for taking the time! As always, navigating economic uncertainty requires a well thought out financial plan. If you’d like to revisit your investment strategy or discuss how these developments may impact your financial goals, don’t hesitate to contact us.
Sincerely,
Kody & Lorena