Trump tariffs are (probably) coming. How much—and where—will they hurt?

U.S. President Donald Trump says he’s following through on his promise to levy punishing tariffs of 25 per cent on imports from Canada and Mexico, sticking to a recently announced “will-he-or-won’t-he” deadline of Feb. 1. The move leaves Canadians asking whether these sanctions represent the highest tariff levels the U.S. will impose, how long they will be in force, and how these sanctions will affect investors and the broader economy. 

The situation might be described as Kafkaesque, given that it’s unclear exactly which transgressions have earned the punishing tariffs. The list of accusations from Trump and U.S. officials has been updated and amended several times. Is the problem undocumented migrants and fentanyl slipping across the Canadian border? Unfair trade practices under the U.S-Mexico-Canada Agreement (USMCA) involving access to Canadian markets for U.S. dairy products? The division of employment opportunities across the auto sector? Canada’s failure to live up to military spending commitments? All of the above?

Part of the confusion stems from the Trump team’s inconsistent messaging. For example, Howard Lutnick, Trump’s nominee for commerce secretary, recently stated that the Feb. 1 tariffs were related entirely to the issue of border security and could be sidestepped by “swift” action. The Canadian federal government had already cobbled together and announced a $1.3-billion border security plan, but that was apparently insufficient to stave off the tariffs.

Such inconsistencies may be a deliberate tactic on Trump’s part, says Vivek Astvansh, associate professor, Desautels Faculty of Management at McGill University, and a researcher on the use of language and rhetoric in trade negotiations. He sees Trump preparing for a longer game.

“I believe we should care less about the reasons Trump is threatening tariffs, because the reason keeps shifting,” Astvansh says. “He’s creating shocks for Mexico and Canada, sowing confusion and uncertainty. In my opinion, this will last until next year when the U.S., Mexico, Canada trade agreement has to be renegotiated. When Canada comes to the negotiating table in 2026, he hopes to see the country weakened, shaken and annoyed, so that we’ll be more likely to agree to terms more favourable to the U.S.”

While many provincial leaders are calling for retaliatory tariffs, Astvansh says that such a show of bravado would be the wrong approach. Instead, he believes negotiators would be better off working quietly behind the scenes, with people in Trump’s inner circle and with state governors, to create a more friendly cross-border business environment, while taking the wind out of the sails of Trump’s public theatre.

“Mutual tariffs will be inflationary and hurt businesses and people in both countries,” Astvansh says.

The question is, how badly will Canadians be hurt?

Jessica Brandon-Jepp, senior director, fiscal and financial services policy, with the Canadian Chamber of Commerce, notes that mutual tariffs between Canada and the U.S. would cut deeply across the North American economy, but would almost certainly cut Canada deeper.

The organization’s model supposes a 25 per cent across-the-board tariff on all imports to the U.S., matched by retaliatory tariffs from exporting countries. Under that scenario, the Canadian economy would enter into recession by mid-2025 and Canada’s GDP would shrink by 2.6 per cent, costing Canadians approximately $1,900 per person annually. U.S. GDP, meanwhile, would likewise take a beating, shrinking by 1.6 per cent and costing Americans about $1,300 per person annually.

In part, the Chamber’s modeling is based on a 10 per cent tariff imposed across the board by President Richard Nixon in August 1971. Although the tariff lasted only four months, it’s estimated that the measure reduced Canadian exports to the U.S by 2.6 per cent. Analysts also projected that the tariff would have resulted in the loss of as many as 90,000 Canadian jobs if they had been imposed for a year.

“Resource-based sectors would be heavily affected,” Brandon-Jepp says of the most recent Trump tariffs. “And in a highly integrated economy, where goods pass back and forth across the border multiple times—for example in manufacturing—you could see an outsized risk of tariffs also being imposed multiple times.”

Clearly, the impact on the real economy could be severe. But in the financial markets, Canadian investors may have an easier time weathering the tariffs.

Angelo Kourkafas, senior investment strategist with Edward Jones, notes that approximately one third of the revenue generated by companies in the S&P/TSX composite index comes from the U.S., and that some sectors exporting large amounts of goods to the U.S are not well represented in the Canadian equity market.

“The auto sector is a good example,” he says. “Automotive components account for 10 per cent of Canada’s exports to the U.S.—the second largest category of exports after oil, gas and minerals. But the auto sector’s representation on the TSX is just 0.5 per cent.”

In addition, many heavily weighted sectors on Canada’s stock exchange export no physical goods to the U.S.—for example, the financial sector, which comprises about one third of the TSX.

That leaves energy and materials as the sectors most likely to bear the brunt of tariffs. Trump’s Jan. 30 tariff announcement contains a faint hope clause—he was, apparently, still considering whether to spare Canada’s oil exports from tariffs. However, as significant as a 25 per cent tariff on oil might be, Kourkafas says he believes that commodity prices will be a more important driver of financial performance for the sector. As a result, U.S. energy policy may play a greater role in energy sector earnings than tariffs.

While Trump’s tariffs on Canadian imports in 2018 resulted in somewhat greater volatility in Canadian equity markets, Kourkafas notes that this was exacerbated by rising interest rates. He cautions investors this time around to play the long game and to avoid short-term, reactionary portfolio shifts, especially in an environment where central banks are trending dovish.

“Many of the issues President Trump cites could potentially see a solution through incremental measures that won’t be too costly for Canada,” he says. “Long-term tariffs and retaliatory tariffs would be like sand in the gears of the economy, making it less efficient, but we don’t expect them to be in effect indefinitely.” 

Investors can shed some trade risk, he says, by maintaining a well-diversified and balanced portfolio across geographic regions. For most Canadian investors, U.S. equity allocations are already a big part of their portfolios, and those holdings will likely be less affected by tariffs.

“We continue to recommend a slight underweight to Canadian large-cap, developed overseas large-cap, and developed overseas small- and mid-cap stocks, offset with an overweight to U.S. large-cap and U.S. small- and mid-cap stocks,” Kourkafas says. “If we do see trade-related volatility show up, it could be a buying opportunity for investors, given that Canada has a favourable backdrop supporting the markets.”

As much as the reality of a 25 per cent U.S. tariff has highlighted the potential for damage to the Canadian economy, Brandon-Jepp says that it also underscores a very real problem that Canadians have placed on the backburner for decades. “Existing internal trade barriers between the provinces are already having an impact on the Canadian economy greater that the potential impact of U.S. tariffs,” she says. “The removal of those barriers would be a huge benefit to our economy and help insulate us against future trade challenges.”

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