Executive summary
On Feb. 20, 2026, the U.S. Supreme Court ruled that the administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose sweeping reciprocal tariffs was unlawful. Within hours, President Trump announced a 10% global tariff under Section 122 of the 1974 Trade Act, alongside expanded product-specific investigations. On Feb. 21, that rate was increased to the maximum 15% permitted under the statute.
The legal framework has shifted. The effective tariff burden has not meaningfully declined.
For Canada, the probability of abrupt, discriminatory tariff escalation has diminished ahead of the CUSMA review. Importantly, USMCA-compliant goods, representing roughly 85% of imports from Canada and Mexico, remain tariff-free. However, protectionism remains embedded and sector-specific measures appear likely to intensify.
At the same time, recent data show that Canada’s export diversification remains heavily concentrated in metals and minerals, particularly gold, rather than broad-based manufacturing strength.
Trade risk has evolved from episodic shock to structural friction. Market leadership is rotating. Cyclical considerations remain central.
The U.S. Supreme Court ruling and immediate policy pivot
The Supreme Court decision removes IEEPA as a tool for broad, discretionary tariffs. Since “Liberation Day,” the U.S. Treasury had collected roughly $ billion in customs duties 1. Approximately $110 billion collected under IEEPA may now face extended legal dispute over repayment 2.
However, the administration responded quickly.
President Trump announced:
- A 10% global tariff under Section 122
- Expanded Section 232, 201 and 301 investigations
- No commitment to refund IEEPA collections
Section 122 provides firmer legal grounding but introduces constraints:
- Tariffs capped at 15%
- Duration limited to 150 days without congressional approval
- Non-discriminatory application across trading partners
The non-discriminatory nature of the tariff reduces the administrations flexibility to apply targeted bi-lateral pressure during negotiations.
Based on import shares, the effective tariff rate now sits near 12%, only modestly lower than the prior 13 to 14% range.
The structure has changed. The protectionist orientation remains.
Implications for CUSMA and North American trade
The CUSMA joint review remains scheduled for mid-2026.
Three outcomes remain possible:
- Extension for another 16 years
- Rolling annual reviews without extension
- Withdrawal with six months’ notice
A full withdrawal scenario could reimpose tariffs of roughly 35% on Canada and 25% on Mexico, likely pushing both economies into recession.
The Supreme Court ruling reduces the likelihood of abrupt, discriminatory tariff escalation. However, the new 10% global tariff applies universally. Canada does not receive preferential treatment under Section 122.
Expanded Section 232 and 301 investigations suggest sector-specific measures may intensify through mid-year.
Policy uncertainty has shifted from a single shock scenario to rolling sectoral pressure and a 150-day policy clock.
Canada’s trade reorientation: Progress, but concentrated
Recent trade data show that non-U.S. goods exports rose 5.8% month-over-month to a record C$21.4 billion. The share of exports destined for the U.S. declined to 71.7% from 75.9% the prior year 3.
However, composition matters.
Of the C$28.8 billion rise in non-U.S. exports over the past year, C$17.2 billion came from metals and minerals, largely reflecting elevated gold flows.
Country level trade balances also show that diversification gains have been concentrated in a narrow set of markets, with limited offset from major partners such as China and the European Union.
Sectors most affected by declining U.S. exports, including chemicals, motor vehicles and forestry, have not yet demonstrated meaningful diversification.
Manufacturing remains soft. GDP growth likely remained modest in the fourth quarter. Trade reorientation is occurring, but it remains commodity-driven and narrow.
Broader macro context
A universal 15% global tariff restores effective tariff levels to those seen prior to the Court’s ruling. While exemptions moderate the direct impact, the broader environment remains characterised by elevated trade friction.
Expanded sector investigations create rolling uncertainty into mid-year. At the same time, equity markets are rotating. Small caps, value and defensive sectors have begun outperforming large-cap growth leadership.
Historically, such shifts often emerge during later-cycle transitions and periods of rising dispersion.
Trade uncertainty has been restructured. It hasn’t disappeared.
Our portfolio implications: Positioning for structural fragmentation and broader participation
The legal reset did not reverse the protectionist shift. A 15% global tariff remains in place. Sector investigations are expanding.
This reinforces our core positioning framework.
We continue to believe markets are transitioning from a narrow, concentration-driven phase toward broader participation. The AI investment cycle remains durable. Earnings leadership is expanding beyond a small group of dominant growth companies.
Our allocations reflect structural fragmentation and rising dispersion.
Overweight U.S. equities
Exposure to U.S. equities remains a core allocation.
The U.S. continues to demonstrate relative earnings resilience, innovation leadership and capital market depth. While tariffs introduce margin considerations, the effective rate remains manageable relative to historical episodes.
Importantly, participation is broadening across sectors and factors rather than remaining concentrated solely in mega-cap growth.
Underweight Canadian equities
Canadian equity exposure remains moderated relative to global benchmarks.
Export diversification has been concentrated in metals and minerals rather than broad-based manufacturing strength. Manufacturing sectors most exposed to U.S. tariffs remain under pressure.
While reduced discriminatory tariff risk is constructive, a universal 10% tariff persists. Canada remains sensitive to U.S. growth and sector concentration limits diversification benefits.
Selectivity remains important.
Underweight international developed markets
Developed markets outside the U.S. continue to face structural growth constraints and sensitivity to global trade drag.
A 15% global tariff environment introduces headwinds for export-oriented economies. Relative earnings visibility remains comparatively stronger in the U.S.
Overweight emerging markets
Emerging markets continue to present relatively compelling valuations and earlier-stage earnings cycles in select regions.
Supply chain realignment and regional trade adjustments may support incremental opportunities over time. Dispersion remains elevated, reinforcing the importance of active selection.
Broadening participation remains central
Market leadership is rotating. Concentration risk is moderating.
Positioning reflects:
- Broader market participation
- Factor diversification
- Reduced dependence on narrow growth leadership
- Participation across sectors and regions
This isn’t a defensive posture. It’s an adaptive one.
The role of liquid alternatives
Rolling tariff adjustments, sector investigations and mid-year policy uncertainty increase variability in returns.
Liquid alternative strategies can enhance diversification and help moderate volatility during policy-driven market shifts.
Resilience is constructed deliberately.
Closing thoughts
The Supreme Court ruling altered the legal pathway for tariffs. The administration’s rapid pivot to a 15% global tariff confirms that protectionism remains embedded.
For Canada, discriminatory escalation risk has declined. However, export diversification remains narrow and growth momentum modest.
Trade friction is now structural. Market leadership is broadening. Dispersion is rising. In this environment, disciplined diversification, factor balance, and integrated alternatives remain central to resilient portfolio construction.
Sincerely
Corrado Tiralongo (he/him)
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management Ltd.
1 Capital Economics
2 Capital Economics
3 Statistics Canada: The Daily — Canadian international merchandise trade, December 2025
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