How Tariffs Could Impact the Economy and Your Investments

The timer is once again ticking on tariffs. On March 1, President Donald Trump may – or may not – impose a 10 per cent tariff on Canadian oil and a 25 per cent tariff on all our other goods. He has already said he would slap 25% tariffs on all aluminum and steel imports into the U.S. on March 12, including from Canada. If the U.S. does place duties on our wares, Canada has said it will respond with a 25 per cent tariff on $155 billion worth of U.S.-made products that cross our border.

Naturally, Canadians are anxious about what all this means for their shopping bills, their jobs and their investments. While the U.S. and Canada have exacted tariffs on one another in the past – including in Donald Trump’s first term – the scope and scale of these duties is unprecedented in modern North American history.

To help you navigate this quickly developing trade spat, here’s a breakdown of how tariffs might work and what they might mean for your portfolio. 

What are tariffs?

Tariffs are essentially taxes that companies must pay on items they import from other countries. If a U.S. food company imports Canadian beef (and Americans import US$3.6 billion worth of beef and pork every year), they will have to pay a 25 per cent charge on top the value of that purchase.¹ While a company could absorb that increased cost and earn less profit, economists anticipate many U.S. businesses may choose to pass those extra charges on to American consumers, which would mean increased price tags in stores or, with oil, at the pump.

But the impact will go far beyond the price of Canadian products on American store shelves. Given how integrated the Canadian and U.S. economies are today, tariffs on Canadian imports will reverberate through the supply chains, since they’ll also apply to parts and raw materials that cross the border. For example, U.S. levies could significantly ratchet up the price of cars and trucks because auto parts can cross the border up to eight times before final assembly, and they will now get hit with tax each time they pass through customs.²

Canada, has also said it would put retaliatory tariffs on all sorts of U.S. goods, including meat, wine and toilet paper. Businesses that operate here will have to pay these taxes, and will likely also pass the extra cost on to consumers.

Impact on economic growth

The effects of tariffs can be wide ranging, both economically and behaviourally. Firstly, according to a recent RBC Economics report, a tariff war could cause the Canadian dollar to weaken further.³ The dollar did reach its lowest point compared to the greenback since 2003 in February, on the day the February tariffs were originally slated to take effect, and then were delayed. A more depressed dollar would offset some of the increased costs for Canadian exports, but it would possibly make it even more expensive to import goods and for Canadians to travel south.

Secondly, businesses in Canada, and especially in the sectors that rely on exports, such as manufacturing, could see layoffs, closures and other significant disruptions. If there are cheaper made-in-the-U.S. alternatives for Americans to buy, then people stateside will likely gravitate toward those less-expensive alternatives, which will negatively impact businesses here. More generally, as we’ve seen in the last two years with rising inflation, if costs get too high, demand could suffer across the board.

According to RBC Economics, if there is a 25 per cent tariff on all steel and aluminum imports, these tariffs could reduce the Canadian GDP by between 3.4 and 4.2 percentage points – which would put us into a recession – and cause unemployment rates to increase by between 2 and 3 percentage points.⁴ As for inflation, the Bank of Canada (BoC) says prices could stay flat or rise by 0.8 per cent in year one and 1.3 per cent in year two depending on how much demand there is for tariffed products; the loonie’s reaction to tariffs; and how quickly businesses pass on any additional costs.⁵

To combat the potential for slower growth, the BoC can continue to cut rates beyond 2 per cent, which is around where RBC economists had seen rates landing by the end of 2025.

Impact on investments

At a high level, markets don’t like uncertainty, but given how tariffs could upend supply chains and well-established commercial norms, investors may want to factor the current trade environment’s ambiguity into their investment analysis. Since company earnings and stock prices are connected, earnings could decline – and potentially taking share price along with it, if demand for goods weakens.

However, there are sectors of the Canadian economy that are more exposed than others to the shock of U.S. protectionism. Those with the highest trade exposure include metal manufacturing, petroleum products, plastics, motor vehicle parts, aerospace and pharmaceuticals. And, as we’ve seen in other economic downturns, if unemployment does rise or consumers once again shift behaviours to combat the impact of rising prices on their pocketbooks, companies in discretionary sectors, such as travel, restaurants and clothing could be impacted.⁶

Will tariffs last?

One thing to consider is that the 25 per cent tariff may not be sustained by future leadership in Washington or even the Trump administration itself given that tariffs have rarely achieved the objectives sought by their proponents in the past. RBC Economics and Thought Leadership found that the tariffs imposed during President Trump’s first term in office did nothing to reduce the U.S. trade deficit.⁷ Plus, already low unemployment, an aging labour force and the prospect of reduced immigration (legal and illegal) limit the U.S. economy’s capacity to bring production back home. In fact, America’s manufacturing capacity fell 2 per cent in 2018 and 2019 following President Trump’s initial tariff increase.

Ultimately, what happens next is anyone’s guess, but as we’ve seen in other economic shocks, whether it was the Great Recession or the COVID-19 crisis, markets eventually recalibrate and rebound. A diversified investment approach spanning multiple asset classes and sectors can help absorb short-term market fluctuations.

Sources:

¹ _{Agriculture Canada, "United States-Canada Agriculture and Agri-food Trade 2023", 2023}

² _{Toronto Region Board of Trade, "[Newly Updated] Talking Points: Cross-Border Trade", 2025} 

³ _{RBC Economics, "A U.S.-Canada trade shock now in play: first economic takeaways", 2025}

⁴ _{RBC Economics, "A U.S.-Canada trade shock now in play: first economic takeaways", 2025}

⁵ _{Bank of Canada, "Monetary Policy Report—January 2025—Canadian economy", 2025}