Tariffs Are Here. How Ugly Could This Get for Canada?

As you surely know by now, on Saturday, U.S. President Donald Trump ordered 25% tariffs against all Canadian goods beginning Tuesday, February 4. The only exception was energy, which will be subject to a 10% tariff. The news wasn’t exactly unexpected. The 47th president has been threatening to put new levies on goods from Canada, China, and Mexico since November. (You can revisit our past coverage if you’re curious about his stated rationale.) Still, for months, people doubted, or altogether wrote off, the possibility that these steep tariffs would be enacted. Surely, the thinking went, trade disruptions would be so painful for everyone involved that an agreement would be hammered out before it came to that. Now such disruptions seem inevitable, especially since Canada has announced retaliatory measures (more on those in a moment). 

The situation is fast developing, but here’s what we know, what it might mean for you, and when the fallout might be felt. 

Is this really happening? By all accounts, yes, the tariffs are really happening. But here’s the thing: Trump has historically followed a similar playbook whenever he negotiates with other countries, and that playbook goes something like: ask for all the chocolate in the candy store, threaten maximum pain if you don’t hand over the sweets, and then shatter a glass gumball machine to sow chaos and confusion. Then negotiators from both countries sit down and hash out what usually ends up being a less extreme deal than Trump’s rhetoric suggests. That’s what happened when the U.S. and Canada haggled over tariffs in 2018, and when the U.S. and China struck a deal the same year (and China didn’t exactly concede much). Both disputes were resolved within months. 

WHAT HAS HAPPENED SO FAR 

At first, it seemed like tariffs were getting rescheduled. On Friday afternoon, Reuters reported that President Trump was expected to push back the start of tariffs to March 1. Then, a few hours later, the White House said nope, that report was wrong. Tariff time is now. 

The loonie took a hit. In response to the news, the loonie — which had already slid to a five-year low against the greenback earlier in the week (mostly thanks to soaring U.S. stock prices) — fell further, to C$1 to US$0.68. The new tariffs will push the Canadian dollar down further, since currencies strengthen whenever customers abroad convert money into your currency to buy your stuff, and currencies weaken whenever demand for your stuff softens. Which will inevitably happen under this new tariff regime. And, if and when the loonie slips, everything Canadians buy from abroad will be more expensive, effectively making Canadians less wealthy. If the loonie falls 5% further, say, Canadians would get 5% poorer relative to Americans.

Canada fired back. In a Saturday-night press conference, Prime Minister Justin Trudeau said Canada will stand united and announced that the country would apply tariffs on $30 billion of U.S. goods starting on Tuesday, and tariffs on another $125 billion of goods beginning in three weeks, to allow Canadian companies time to find new suppliers. He warned that these retaliatory tariffs would “have real consequences” for U.S. consumers, and he hinted that larger measures are still on the table — like blocking the export of critical minerals, electricity, or oil. Trudeau and politicians across the country have urged Canadians to buy domestic products over American-made ones. Premiers, for their part, began announcing non-tariff actions, such as pulling U.S. liquor off store shelves. The goal, of course, is that these measures will make life uncomfortable enough for Americans that President Trump quickly repeals the tariffs. 

Will retaliation work? The U.S. has a giant upper hand — a huge bald-eagle talon, if you will — in any negotiation with Canada, because it’s a relatively closed, or self-sufficient, economy, whereas we depend deeply on exports. Still, tariffs on Canada and Mexico, two of the U.S.’s largest trading partners, threaten to devastate myriad U.S. industries, which is why The Wall Street Journal’s conservative editorial board called this “the dumbest trade war in history.”  The U.S.’s GDP could shrink by 1.6% if the trade war drags on, and each U.S. household will pay an estimated US$830 more for goods this year. One would assume all that pain would be enough for President Trump to reverse course, but, really, who knows.

WHAT MIGHT HAPPEN IN THE SHORT TERM

Not all industries will feel the pain equally. Or at the same time. When U.S. and Canadian customs and border agents start collecting tariffs at the hundreds of ports of entry into each country on Tuesday, importers will immediately feel the sting — and those costs will be passed on to suppliers, and consumers (aka, you). But that process could take weeks depending on the industry; businesses will sell out of their current inventory before they begin stocking higher-priced levied goods. But there are exceptions to that. Automakers are particularly sensitive to tariffs, since vehicle parts often cross the border multiple times during production. Vehicle manufacturing in North America could shut down as early as this week, since shipping parts could become uneconomical. Gas prices could also rise within days. 

Markets could take a hit. Tariffs carry significant uncertainty, and uncertainty is one thing stock markets do not like. The TSX quickly shed 1.3% on Friday, and tariffs could pull down Canadian stocks further, since they’ll presumably hurt corporate profits. As for U.S. and international stocks, it’s tough to guess how they might respond in the short term; market futures opened lower on Sunday night, but the drop wasn’t gigantic. Fintwit is really doomy about tariffs, but fair warning: trying to trade in response to social-media sentiment is a reliable way to lose money.

Which leads us to this brief PSA: this might seem small compared to bigger worries about the economy or your job, but all this trade-war drama underscores the importance of diversifying your portfolio. Bad things happen to different countries, assets, and industries at different times, which is why you don’t want to be over-concentrated in any one region or sector. Big market uncertainties are also a great reason to build up an emergency fund, so that you’re secure no matter what happens. And remember: all sorts of studies suggest that individual investors who panic-sell during moments of uncertainty tend to lose more money than those who stay put. 

AND WHAT HAPPENS IF THIS GOES ON FOR MONTHS?

Inflation could creep up. That’s because, after businesses burn through their inventory, they’ll pass on the higher cost of goods to customers. That could push up inflation by 1.3% in Canada and 0.6% in the U.S. The thing is, inflation is likely a secondary concern when it comes to tariffs, since tariffs stand to slow down the economy to such a painful degree that inflation probably wouldn’t stay high for long. On that point…

We could get a recession. Business leaders are in a holding pattern, crossing their fingers that the trade war blows over fast. But they’ll have hard decisions to make — around inventory, around future investments, around headcount — if tariffs stay in place long and hurt profits. The steel, agriculture, machinery, lumber, and mining industries are expected to be hit particularly hard. Frances Donald, RBC’s chief economist, recently warned that if high tariffs remain in place for six months, the result could be “one of the most prolonged, problematic recessions Canada has ever experienced.” In such a scenario, Canada’s GDP could contract by 1% to 3.25%, and more than 400,000 people could lose their jobs. Obviously, let’s hope it doesn’t come to that.

SO WHERE DOES ALL THIS LEAVE US?

The tariffs come at a moment when unemployment is already at 6.7%. And there’s no denying that the longer this trade spat drags on, the more Canadians will find themselves suffering financially. And the suffering will be real. But, at the risk of sounding annoyingly optimistic, this shock could spur Canadians to make positive changes. Some premiers, for instance, are already discussing the need to remove barriers to interprovincial trade, which could give our economy a needed boost by making it easier to buy domestic goods. And the tariffs have already resulted in a degree of national unity not seen since that Molson commercial came out 20 years ago. If you’re feeling panicky, try to bear in mind that the history of trade between Canada and the U.S. is long, but also rife with skirmishes. Canada has held its own in the past, and Canadians seem ready to support each other again.

Written By

Jared Sullivan

Jared Sullivan is an editor for Wealthsimple Magazine and author of the book "Valley So Low: One Lawyer's Fight for Justice in the Wake of America's Great Coal Catastrophe".

Written By

Sarah Rieger

Sarah Rieger is a news writer for Wealthsimple Magazine. She was previously a staff writer and editor at CBC News and HuffPost Canada. You can reach her at srieger@wealthsimple.com, or on Twitter at @sarahcrgr.