Canada's Tariff Tangle: What Investors Need to Know Now

In a world increasingly defined by surprise policy shifts and geopolitical gambits, tariffs have once again become front-page material. The latest announcement from the White House sent ripple effects across global markets—but for Canada, there was a surprising twist in the tale.

In a special edition of The Download¹ podcast, David Richardson sits down with RBC Global Asset Management's Chief Economist Eric Lascelles to make sense of the announcement and offer much-needed clarity to Canadian investors. What unfolds is a conversation that, while riddled with uncertainty, carves out key signals for portfolio positioning, market behavior, and economic expectations going forward.

From Enemy to Ally in 24 Hours?

"It’s almost hard to fathom how Canada and Mexico have gone from enemies number one and two to friends number one and two in the span twenty-four hours," remarks Lascelles, highlighting the whiplash-inducing shift in trade policy focus.

The new tariff regime, announced with fanfare in the Rose Garden, came with major implications for multiple countries—but Canada and Mexico, somewhat shockingly, appear to have escaped the harshest measures. As Lascelles observes, “Canada and Mexico are coming off, you know, below the better than the best case scenario, which, of course, wasn’t on anyone’s bingo card”.

While the U.S. imposed sweeping tariffs—20% on the EU, 24% on Japan, and a whopping 54% on China (when factoring in earlier rounds)—Canada was spared the bulk of the pain, at least for now. But the question on everyone's mind is: Will it last?

The Math Behind the Madness

Lascelles notes that the calculation for these tariffs wasn’t based on economic nuance, but simple arithmetic: “Your trade surplus with the U.S. divided by the total flow of trade into the U.S. from that country—that’s actually the number that reveals the tariff”.

This explains the seeming randomness of the figures. “It was not a sophisticated critique of value-added sales taxes… it was really right down to who has a trade surplus,” he says, suggesting a transactional mindset driving policy rather than a strategic economic framework.

The Real Economic Costs: U.S. Takes the Hit

While much of the media spotlight is on which countries are on the tariff hit list, Lascelles urges listeners to refocus on the broader economic cost. “The U.S. economy is likely in this scenario to grow on the order of a percentage point or a percentage point and a half less quickly over the next few years,” he warns. Inflation? Also likely to be a full percentage point or two higher than it would have been without the tariffs.

The forecast prompted some notable moves. Goldman Sachs, among others, bumped their U.S. recession risk from 25% to 35%. Lascelles and his team have followed suit, lifting their estimate from 10% to “a 25% plus” chance. “I would still really struggle to think it’s 50% or higher,” he notes, adding that most of the U.S. economy remains domestically driven and resilient for now.

Still, the impact shouldn’t be trivialized. “Tariffs do a number on growth… and there is the risk that households and businesses really just screech to a halt,” Lascelles acknowledges.

Canada: Dodging the Blow, But Not Unscathed

Lascelles was quick to remind investors that Canada is not entirely off the hook. “Anything not compliant under the USMCA is presently subjected to a 25% tariff,” he says, pointing out that roughly 60% of Canadian exports initially failed compliance due to paperwork issues.

Steel and aluminum tariffs remain fully in place—painful particularly for Canada, the most exposed of U.S. trade partners in this area. Meanwhile, the 25% auto tariff “started this morning at midnight,” and while U.S. value-added is exempt, Canadian components are not.

Sector-specific tariffs—on copper, forestry, pharmaceuticals—are also coming, and many are likely to hit Canadian exporters squarely. “Canada is being hit by some things. It was not a complete carve out,” Lascelles cautions.

Strategic Posturing Ahead of USMCA Negotiations?

Lascelles suggests the lighter touch toward Canada may be strategic. “It probably makes sense to put those big tariffs or at least to threaten the big tariffs against Canada and Mexico right before [USMCA negotiations], and that creates the leverage for the U.S. to extract concessions,” he explains.

In short, Canadian investors shouldn't assume this reprieve is permanent. Lascelles lists a number of U.S. grievances still in play: Canada’s digital services tax, supply management, low defense spending, and oligopolistic service sectors. “It’s hard to fathom the net conclusion from all of that is, and Canada gets no tariffs,” he says pointedly.

Investment Implications: Opportunity in Uncertainty

So how should Canadian investors think about portfolio positioning in this volatile environment?

“Canada suddenly looks a little bit more attractive than it did before,” says Lascelles, while reminding listeners that we likely haven’t seen the end of tariff-related developments.

On broader portfolio strategy, he remains pragmatic: “This is a time to have a portfolio that’s not too wildly different from balanced so that you can actually take advantage of opportunities as they come along.” Dollar-cost averaging, he emphasizes, remains a sound strategy.

Richardson points to recent moves made by RBC’s own Sarah Riopel, who has “added to the equity position in her portfolio—a little nibble, 1% add,” taking advantage of a 10% market decline. The bond side of the portfolio, adds Richardson, “has provided that insurance” as rates have fallen alongside equity volatility.

In Lascelles’ words: “There are opportunities when markets move.”

Watch This Space

Tariffs, like interest rates and inflation, have emerged as wildcards that can reshape portfolios and national economies alike. In this case, the early read is that Canada has temporarily sidestepped a worst-case scenario—but Lascelles urges caution. “Surprises have been constant. Let’s not grow complacent now,” he warns.

In an environment where geopolitics increasingly drives economic outcomes, investors need a blend of vigilance, balance, and tactical agility. As Richardson puts it, "There's a method to his madness and a madness to his method”—and that's as good a summary of today's trade policy climate as any.

Footnote:

1 “Canada under tariffs: Analyzing trade and economic implications." RBC Global Asset Management, 3 Apr. 2025, www.rbcgam.com/en/ca/insights/podcasts/canada-under-tariffs-analyzing-trade-and-economic-implications/detail.