U.S. President Trump’s tariff announcement has ushered in a historic escalation of U.S. trade protectionism. (1)
The effective U.S. import-weighted tariff rate has surged to 26% - its highest level in over a century - following the implementation of a reciprocal tariff regime that penalizes trading partners based on their perceived trade barriers. While Canada may have avoided the worst, a 5% effective tariff on Canadian exports still represents a meaningful shift in cross-border trade dynamics. For Canadian investors, this evolving policy backdrop brings implications for inflation, growth, and portfolio construction.
A Tariff Shock with Global Reverberations
(2)Under the new U.S. framework, all countries face a 10% baseline tariff, with significant variations above that depending on country-specific trade policies. Vietnam and China were targeted most aggressively (46% and 34%, respectively), while U.S. allies such as Canada and Mexico benefit from partial exemptions—conditional on United States-Mexico-Canada Agreement (USMCA) compliance.
These tariffs are expected to raise (3) up to $700 billion in annual U.S. customs revenue. If that revenue is recycled into consumer tax cuts, the economic drag could be modest. However, if used for deficit reduction, the U.S. may face a fiscal tightening exceeding 2% of gross domestic product (GDP)—an outcome that could stall growth and increase recession risks. We have downgraded our expectations for U.S. equities significantly considering our expectations for a weaker economic backdrop and geopolitical uncertainty in technology and trade.
Canada’s Temporary Relief, Lingering Risk
Canada was spared the full impact of the new U.S. tariffs, with compliant USMCA goods exempt. However, that protection is contingent. Sectors like automotive and agriculture still face margin pressure from compliance costs and shifting rules of origin. And while Canada may compare favorably to Asia or the European Union, its historical trade advantage has eroded as other allies (e.g., the U.K. and Brazil) receive the baseline 10% tariff with less restrictive terms. Moreover, if U.S. demand slows as a result of higher consumer prices, Canada’s export-heavy economy could feel the ripple effects. Any downturn in the U.S. could quickly spill into Canadian manufacturing and energy.
Tariffs are Not Costless
Despite political rhetoric, tariffs function as a consumption tax—paid by importers, not exporters. They raise input costs, distort supply chains, and ultimately feed into consumer inflation. We expect the U.S. Consumer Price Index (CPI) to rise above 4% this year due to tariff-driven price pressures. In Canada, inflation remains softer, but a weaker Canadian dollar—if monetary divergence between the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed) persists—could import price pressures at a fragile moment for domestic demand.
A Flawed Fix for the Trade Deficit
The stated rationale for these tariffs—to reduce the U.S. trade deficit —deserves scrutiny. As economist Maurice Obstfeld of the Peterson Institute argues, America’s trade imbalance is primarily a function of domestic policies: a chronic under-saving problem driven by persistent fiscal deficits and a tax system that prioritizes consumption (4) . Tariffs may shift the composition of trade, but they will not solve the underlying imbalance.
Douglas A. Irwin, the John French Professor of Economics at Dartmouth College and a leading authority on trade policy, echoes this view. In his work, including the widely respected books (5) Free Trade Under Fire and (6) Clashing over Commerce: A History of U.S. Trade Policy, Irwin argues that the U.S. trade deficit is less a symptom of foreign unfairness and more a result of domestic fiscal imbalances and a tax system that discourages savings. The solution, he suggests, lies in restoring fiscal discipline, reforming tax incentives, and encouraging investment and savings rather than relying on tariffs that ultimately burden consumers.
Portfolio Implications: Building Resilience
In this environment of rising protectionism and geopolitical tension, diversification and risk management are paramount. We believe consideration should be given to:
- High-quality, domestic-oriented Canadian equities: Companies less exposed to cross-border supply chains may benefit from reduced uncertainty and resilient margins.
- U.S. exposure: While exposure to the U.S. is an essential element in Canadian portfolios, the April 2 announcement of larger-than-expected tariffs on U.S. imports has led us to believe that the economic backdrop will no longer be sufficiently conducive to a rally in equities. Secondly, the shift in the AI narrative has shaken conviction that technology will drive up the index.
- Uncorrelated alternatives: Managed futures and other non-long only strategies can help mitigate volatility linked to trade and currency shocks
Conclusion
For Canada, the immediate shock may appear manageable, but the broader implications are more profound: a more fragmented trade regime, less policy coordination, and higher volatility in cross-border economic activity. Navigating this landscape will require strategic agility, diversified portfolio construction, and close monitoring of trade developments.
While Canada may have avoided the harshest blows, this is not a moment for complacency. Tariffs are not costless — and their full economic, inflationary, and geopolitical consequences will take time to materialize. This is a reminder that economic and portfolio resilience must be actively built — not assumed or incorporated after the fact — in a world where policy risk has returned to the forefront of global investing.
Sincerely,
Corrado Tiralongo
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management
1 Tax Foundation. (2025) Trump Tariffs: The Economic Impact of the Trump Trade War. Retrieved from https://taxfoundation.org/research/all/federal/trump-tariffs-trade-war/
2 Newsweek. (2025) Trump Tariff Chart: Full List of Countries Hit with 'Reciprocal' Tariffs. Retrieved from https://www.newsweek.com/trump-reciprocal-tariff-chart-2054514
3 Wall Street Journal. (2025) Economists: Tariffs to Raise $700 Billion for U.S. and Boost Inflation. Retrieved from wsj.com/livecoverage/trump-tariffs-trade-war-stock-market-04-02-
4 Wall Street Journal. (2025) Piper Sandler Economists Forecast Tariffs Will Spur Higher Inflation, Economic Contraction. Retrieved from https://www.wsj.com/livecoverage/trump-tariffs-trade-war-stock-market-04-02-2025/card/
5 Douglas A. Irwin. (2015) Free trade under fire
6 Douglas A. Irwin. (2017) Clashing over Commerce: A History of U.S. Trade Policy
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