Navigating tariff tensions: What Canadian investors need to know

The policies of the new U.S. administration under President Donald Trump have focused on a more protectionist trade policy that includes levying tariffs, proposing trade restrictions and renegotiating existing trade agreements. The threat of tariffs by the U.S. has, in turn, led to threats of reciprocal tariffs from Canada, as well as other regions and countries. The possibility of an ongoing trade war has brought volatility back to global markets.

If you’re wondering what all this means for your financial future, you’re not alone. Tariffs create uncertainty for consumers, business owners and investors alike, but investors need not retreat into financial bunkers. Staying disciplined and working with your financial advisor to ensure your portfolio reflects your goals and circumstances remains your most reliable defence during this latest economic skirmish.

Here’s a breakdown of how tariffs work, why countries impose them, their potential effects on Canadian markets and what all this may mean for your investments.

What exactly is a tariff, anyway?

A tariff is simply a tax imposed by one country on goods imported from another. The business that brings the item into its country pays the duty, which makes the imported products more expensive, potentially affecting consumer behaviour and business operations.

Countries impose tariffs for various reasons. When seeking to rebalance a trade deficit, for instance, a country might impose tariffs to raise revenue. Protecting domestic industries the government deems important to the economy, along with the jobs that come with them, is another common motivation. Tariffs effectively make foreign-produced goods more expensive, so that domestic products seem more attractive to consumers.

Of course, tariffs can also be used as an extension of foreign policy, to exert economic leverage and protect national interests. In this case, Trump has raised a litany of concerns about the Canada-U.S. border, claiming challenges such as illegal migration and the flow of lethal narcotics like fentanyl as a major driver in his decision. 

The economic impact of tariffs

Now that you understand why a country might introduce tariffs, here’s how they could affect the economy. Tariffs on imported goods typically increase the prices that businesses pay to bring an item into their country. They usually pass those costs onto consumers, which can potentially fuel inflation. Tariffs can reduce trade and invite retaliatory measures from affected countries. Just as U.S. tariffs could increase the cost of lumber, cars and fertilizer critical to that country’s agricultural sector, retaliatory tariffs put in place by Canada could mean higher costs at grocery stores, as well as for products like American wine and spirits, and appliances that incorporate U.S. materials. That, in turn, could cause consumers to spend less, which would cause our economy to slow.

In this instance, tariffs could encourage Canadian companies to move warehouses or even head offices to the U.S. to get around the additional tax. That would have an impact on Canadian jobs and our own economic growth. It’s a similar story with supply chains, such as in the auto sector, where parts tend to cross the Canada-U.S. border multiple times. If cars become more expensive to produce, manufacturers may reshape their supply chains to become U.S.-only, which would affect our economy further.

With US$2.6 billion crossing the border daily, the Bank of Canada says tariffs would be extremely disruptive to Canadian economic growth, with our GDP potentially falling by between 2.2% and 3.0% in the first year they are implemented.

How tariffs could impact Canadian investors

Tariffs can have several impacts on the market and investors, with the economic uncertainty alone leading to increased volatility.

The impact will be felt hardest by industries that rely on cross-border trade, with the automotive, agriculture and manufacturing sectors especially vulnerable. The trade uncertainty has already weakened the loonie, with forecasters expecting that slide to continue before recovering, while the cost of consumer goods is likely to increase. Companies may face higher costs and disruptions if they have complex supply chains that involve goods from countries affected by tariffs. If companies have to pay more to import goods, or move operations south, or see a reduction in spending on their goods, their earnings will fall, which will ultimately lead to lower stock prices.

Saying that, investors must remember that while uncertainty is a constant in investing, so is opportunity. Now’s a good time to focus on the fundamentals: diversify across less vulnerable sectors, focus on quality holdings with strong balance sheets, and maintain a long-term perspective. What will matter most to your long-term financial success is not how markets respond to today’s headlines but how you respond to market movements.

It’s important to seek financial advice to understand what this might mean for your portfolio. Speak to your financial advisor, or subscribe to Fidelity’s investor newsletter to stay up to date.