Note: It appears that there may start to be some movement on delaying tariffs on goods that USMCA compliant until April 2^nd when the US plans to announce further broad restructuring of Trade Policy.

US Tariffs Come Into Effect

The Trump administration has reignited trade tensions by implementing a sweeping set of tariffs that will significantly impact the economic landscape of North America.

Effective March 4, the United States has imposed the following measures:

• A 25% tariff on all non-energy imports from Canada and Mexico.

• A 10% tariff on energy imports from Canada.

• A 25% tariff on all imports from China, in addition to existing trade levies.

While the administration has officially invoked the International Emergency Economic Powers Act (IEEPA) to justify these tariffs—citing border security and drug-related concerns—the broader intent appears to be a strategic push to onshore production and fundamentally reshape North American trade dynamics. This policy maneuver represents a substantial shift in the U.S. trade stance, one that will have far-reaching implications for businesses, consumers, and investors on both sides of the border.

Canada has swiftly responded with 25% retaliatory tariffs on C$155 billion worth of U.S. goods, implemented in two phases: $30 billion immediately, with the remaining $125 billion to follow after 21 days. The risk of further escalation remains significant, as the U.S. administration has signaled a willingness to expand the scope of tariffs should Canada retaliate further. Additionally, several Canadian provinces have announced or are considering non-tariff barriers that could further impact cross-border trade.

Adding to the uncertainty, on April 1, the Trump administration is set to receive three reports under the America First Trade Policy memorandum, which could lead to additional industry-specific tariffs under Sections 201 (safeguard measures), 232 (national security), and 301 (unfair trade practices). This raises the possibility that tariffs on Canada and other trading partners could not only persist but increase in scope and severity over time.

A key factor in this policy shift is the absence of further negotiations, as President Trump stated there is "no room left" for discussions on Canada and Mexico tariffs. While there were prior delays in tariff implementation, this round appears definitive, with limited likelihood of reversal in the near term. Notably, Trump’s administration has also announced an additional 10% tariff on imports from China, which would increase core inflation by an estimated 0.1%, while the Canada-Mexico tariffs are projected to raise U.S. core prices by approximately 0.6%.

The trade conflict introduces a substantial layer of uncertainty for businesses and financial markets. As policymakers, investors, and corporate decision-makers navigate this rapidly evolving landscape, a clear understanding of the economic ramifications is essential.

Economic Impact on Canada: Heightened Risks of a Recession

If the current tariff framework remains in place for an extended period—potentially a year—the Canadian economy faces a material risk of contraction. Given that exports to the U.S. account for approximately one-fifth of Canada’s GDP, the imposed tariffs will have a profound effect on multiple fronts. Real GDP growth is expected to decline by approximately 1.5 percentage points, bringing 2025 GDP growth down to a mere 0.5%. The unemployment rate is projected to rise above 8% as key export-driven industries absorb the economic shock, and CPI inflation is expected to rise by nearly 1 percentage point, driven by retaliatory tariffs, supply chain disruptions, and a depreciating Canadian dollar. Business investment is also likely to contract, particularly in trade-sensitive sectors such as manufacturing, energy, and consumer goods.

The Bank of Canada (BoC) is expected to take a proactive stance in mitigating the economic slowdown. Given the combination of weakened demand and deteriorating business confidence, monetary policy adjustments are expected to be more aggressive than previously anticipated. While the BoC had initially projected a gradual easing cycle, market expectations have now shifted toward a more pronounced rate-cut trajectory, with the policy rate likely to reach 2.0% by mid-2025. However, policymakers will need to carefully balance their approach, as inflationary pressures stemming from supply constraints could limit the extent of rate cuts.

From a sectoral standpoint, industries that derive a significant portion of their revenues from U.S. exports will be disproportionately affected. Automobiles and auto parts are highly vulnerable due to their deep integration across North America, while industrial metals, manufacturing, consumer goods, and agriculture will all experience headwinds. Energy exports, though also affected, may experience a lesser impact due to a weaker Canadian dollar, U.S. refineries absorbing cost increases, and flexible pricing strategies among Canadian producers to retain market share.

The Structural Trade Dilemma and Inflation Risks

As tariffs succeed in reducing imports—either through lower demand or through substitution to non-tariffed goods—government revenue from tariffs actually falls, exhibiting characteristics similar to a Laffer Curve for trade. The administration’s goal of reducing bilateral trade deficits overlooks the global trade shifts that naturally occur due to substitution effects. While the U.S. trade deficit with China has declined, other trade deficits have widened due to the redirection of imports.

Furthermore, the prospect of reshoring U.S. production and increasing manufacturing employment is challenged by long-term structural forces. Decades of gains in manufacturing productivity have doubled U.S. industrial output while significantly reducing employment in the sector. The rise of automation and artificial intelligence (AI) is likely to accelerate this trend, making it difficult for tariff policies to materially restore domestic manufacturing jobs.

The Inflationary Trade-off

Tariffs function as a direct tax on imports, and their impact on consumer prices largely depends on demand elasticity, exchange rate movements, and the ability of domestic producers to substitute supply. In past tariff rounds, foreign exporters—especially China—did not meaningfully reduce prices, and U.S. consumers bore the brunt of higher costs. Studies have found a nearly one-for-one pass-through from import prices to consumer costs, meaning tariffs directly raise inflation.

The latest round of tariffs poses an even greater inflationary risk due to the expanded scope of affected goods, covering essential consumer products. The administration’s efforts to reduce transshipments and ensure compliance with broader tariff enforcement could limit the ability of firms to evade price increases. Additionally, the current inflationary environment amplifies the risk that higher tariffs will have a more pronounced effect on consumer prices. A universal tariff policy, if implemented, would create a stronger implicit subsidy for domestic manufacturing, but at the expense of resource misallocation, reduced productivity, and potentially higher long-term inflation.

Conclusion: Policy Uncertainty and Risk Management

The imposition of these tariffs introduces significant economic, market, and investment risks. Geopolitical and supply chain disruptions, currency depreciation pressures on the CAD, long-term inflation risks due to structural inefficiencies, and potential shifts in global trade partnerships will all be critical variables to monitor. The policy landscape remains highly fluid. While the administration aims to achieve trade balance and domestic economic gains, the trade-offs in inflation, investment uncertainty, and economic efficiency may ultimately undermine the effectiveness of broad-based tariffs. Investors and businesses will need to remain highly adaptable as developments unfold.