The Trade Breakdown: What Happened

Key Sticking Points

Negotiations faltered over several issues:

• Auto sector tariffs
• U.S. demands on Canada's ability to pursue other trade agreements
• Canadian sovereignty and cultural protections
• Earlier signs of progress, then impasse

New Tariffs at a Glance

• 50% tariff on roughly $28 billion of Canadian goods
• Retaliatory tariffs from Canada effective September 8
• Newly tariffed goods represent approximately 5% of Canadian exports to the U.S.
• More than 80% of exports continue to flow tariff-free under CUSMA

Understanding the Economic Impact: Aggregate vs. Regional

The Aggregate Picture Looks Manageable

Tariffs affect approximately 0.4% of Canadian GDP and employment. RBC Economics has not materially changed its forecast for Canadian economic growth (1.3% to 1.8% annually). The federal government is supporting affected workers and businesses with $7.5 billion in new support, plus nearly $25 billion introduced since the trade dispute began in early 2025. Canada's relatively modest government debt provides policymakers flexibility if additional support is needed.

But Aggregate Numbers Hide Real Challenges

Electrical equipment, plastics, furniture, and wood products are among the most exposed sectors. The impact is concentrated in Quebec, British Columbia, and Ontario. Some industries and regions face disproportionate pressure, a reality that aggregate statistics don't capture.

Learning From Recent History: Can Canada Adapt?

Trade Diversification: Progress, With Caveats

In 2025, exports to the U.S. fell by roughly $35 billion. But exports to other countries increased by $29 billion; a substantial offset. However, here's the important caveat: much of that increase reflected higher gold prices, not broad-based market expansion. Diversifying trade relationships is a longer-term process, not a quick fix.

What Happens Next?

Key Questions for the Economy

• How long will tariffs remain in place? Longer persistence = greater drag on spending, investment, and hiring
• Will tariff measures broaden further? Additional tariffs would amplify economic pressure

Political Dynamics

Recent surveys show most Canadians supported walking away rather than accepting an unfavorable deal. This may give the federal government latitude to remain patient in negotiations. However, entrenched positions on both sides complicate the path to agreement. Uncertainty itself creates challenges for business planning.

The Economy vs. The Equity Market: A Critical Distinction

Market Reaction So Far: Relatively Muted

• Canadian dollar edged lower
• Government bond yields declined (investors pricing in slower growth)
• Canadian equities slightly higher

Why Markets May Be More Resilient Than Economy

Canada's stock market composition differs significantly from the overall economy:

Financials, Energy, and Materials account for ~70% of the S&P/TSX Composite.

• Financials: Limited direct tariff exposure; potential indirect pressure from slower domestic growth
• Energy & Materials: Influenced more heavily by global commodity prices than tariffs

This differs from the broader economy, which faces direct impact from tariffs on goods like electrical equipment, furniture, and wood products.

Equity Market Fundamentals Remain Sound

• Recent Canadian bank earnings exceeded expectations
• Solid domestic business results
• Strong capital markets activity
• S&P/TSX Composite earnings expected to grow ~25% this year, ~10% in 2027

Our Perspective: Uncertainty Is Normal

Today's environment includes multiple sources of uncertainty:

• Greater scrutiny of AI investment cycle durability
• Higher long-term bond yields
• Volatile energy prices amid unresolved Middle East conflict
• Canada-specific: renewed trade frictions increasing downside economic risks

Yet the global economy remains on a firm footing, keeping corporate earnings on an upward trajectory.

What This Means for Your Portfolio

This is a useful reminder that uncertainty is an inevitable part of investing. Market volatility will likely continue, but short-term uncertainty shouldn't override long-term strategy.

Our approach remains unchanged:

• Maintain disciplined portfolio diversification
• Keep short-term uncertainty in perspective
• Focus on fundamentals: earnings growth, economic resilience, quality companies
• Avoid reactive changes based on headlines

Markets don't avoid volatility during uncertain times but historically, disciplined investors who stay invested have fared better than those who try to time or avoid uncertainty.

Next Steps

• If current trade tensions or market developments are creating concerns about your portfolio, please reach out. We're here to help you maintain perspective and confidence in your long-term strategy.
• We remain committed to keeping you informed as developments unfold.
• Share this blog with friends and family who may be concerned about trade impacts.

Key Takeaways:

• Tariffs affect ~5% of Canadian exports; 80%+ continue tariff-free under CUSMA
• Economic impact is ~0.4% of GDP; manageable in aggregate, but concentrated in specific sectors and regions
• Duration and breadth of tariffs are the key economic variables going forward
• Canadian equity markets may prove more resilient than the broader economy due to sector composition
• Corporate fundamentals and earnings growth remain constructive despite policy uncertainty