The potential imposition of U.S. tariffs poses a significant concern for Canada's economy, given the deep trade ties between the two nations. Canadian merchandise exports make up about 25% of its GDP, with nearly three-quarters heading to the U.S., especially in sectors like energy, metals, and auto manufacturing.
RBC Global Asset Management warns that in a worst-case scenario where 25% tariffs are imposed and maintained for two years, Canadian GDP could shrink by as much as 4.5 percentage points. However, this scenario is deemed unlikely. Instead, more probable scenarios predict a smaller impact on GDP ranging from 0.3 to one percentage point.
Economists generally view tariffs as economically detrimental to both parties involved. The Canadian government has indicated readiness for "dollar-for-dollar" countermeasures if U.S. tariffs are enacted.
A report by RBC Economics highlights that "the reality of a tariff shock is trickier" than can be estimated simply through job or growth figures. Tariffs typically lead to an initial surge in economic activity followed by reduced demand and increased prices.
Despite concerns over U.S. trade policy, the Canadian stock market may endure these challenges better than anticipated due to limited exposure in goods-producing industries compared to services sectors like Information Technology and Financials.
Past experiences suggest that tariffs might be used as negotiation tools rather than permanent measures. During his first term, President Trump employed tariffs leading to new trade agreements such as USMCA.
Currency markets have already reacted with the Canadian dollar weakening since November's U.S. presidential election, potentially offsetting some tariff impacts on costs for U.S importers.
Investors are advised to maintain long-term strategies and diversify across companies with strong business models and financial resilience amid potential trade policy shifts.