Tariffs, Trade Wars, and Impact on Markets: The Fallout from Trump's Economic Policy
Evaluating my Canadian investments, their risks and opportunities in an era of protectionist trade policies
The recent announcement of sweeping tariffs1 imposed by President Donald Trump on Canadian, Mexican, and Chinese goods has sent shockwaves through financial markets and international relations. While the administration cites concerns over drug trafficking and immigration as justifications, Canada, Mexico, and China have responded with their own countermeasures. The resulting trade tensions have the potential to significantly disrupt supply chains, increase consumer costs, and strain diplomatic ties between these nations and the United States.
As Warren Buffett aptly put it:
“Tariffs are a tax on consumers. They change what people buy and where things are produced. You don’t realize what you’d be paying for the clothes you’re wearing today if we had a rule that they all had to be made in the United States.”
His words highlight the broader economic consequences of tariffs: raising costs for consumers and disrupting global supply chains by forcing inefficient production shifts.
Understanding the Tariffs and Retaliation
On February 1, 2025, President Trump signed executive orders imposing 25% tariffs on imports from Mexico, Canada, and China, with a 10% tariff specifically on Canadian energy products. These measures were set to take effect on February 4, 2025. The administration cited the need to curb the flow of fentanyl and illegal immigration as primary reasons for these tariffs.
In response, on February 2, 2025, Canadian Prime Minister Justin Trudeau announced retaliatory 25% tariffs on U.S. goods, including American beer, wine, bourbon, fruits, and household appliances. Mexico had also vowed to implement countermeasures, though specific details were pending.
However, on February 3, 2025, Mexico and Canada secured a reprieve on tariffs for 30 days from Trump after Presidents Claudia Sheinbaum and Prime Minister Justin Trudeau agreed to stricter measures on drug trafficking and border control in separate calls with him.
On February 4, 2025, China has retaliated by imposing a 15% tariff on U.S. coal and liquefied natural gas (LNG), along with a 10% tariff on crude oil, agricultural machinery, and certain automobiles. Additionally, China has tightened restrictions on U.S. tech-driven companies operating in its market, adding new layers of trade tension to an already complex global economic environment.
Trump has also indicated plans to impose tariffs on the European Union and global semiconductor industry. Many experts warn that these moves will significantly damage U.S. international relations. Canada, for example, is now actively seeking new trade partners due to diminished trust in the U.S. The rest of the world is likely to follow suit, potentially undermining America’s economic influence over time.
With Canadian holdings in my portfolio, I will focus on the impact of tariffs on Canadian businesses if they are fully implemented.
Key Sectors Affected
The interconnected nature of the U.S. and Canadian economies means these tariffs would have a substantial impact on a number of sectors:
Energy sector: The U.S. imports more Canadian oil than from all other countries combined. Replacing this supply will be extremely difficult, likely leading to higher fuel and energy costs for American consumers. Brookfield Renewable Partners’ (BEP 0.00%↑) CEO, Connor Teskey, stated during the Q4 2024 earnings call on January 31, 2025 that if tariffs were imposed, the company would “pass that cost through in the form of a higher PPA2”, effectively shifting the burden onto customers. Since Brookfield’s major clients include corporations with high energy demands, such as Microsoft for its data centers, these increased costs could cascade through the economy, ultimately affecting consumers.
Lumber industry: The U.S. also imports more Canadian lumber than from any other nation. Previous attempts to replace Canadian imports with domestic production have largely failed. A 25% tariff on softwood lumber would significantly drive up new home construction costs in the U.S.
Manufacturing & retail: The tariffs would directly impact companies that rely on cross-border supply chains, increasing costs for raw materials and finished goods. Many U.S. businesses import key components from Canada and Mexico, and higher tariffs could lead to price hikes, making American-made products less competitive in global markets. This could ultimately hurt both manufacturers and consumers, as rising costs are passed down through the supply chain.
Economic Fallout for Canada and Market Reaction
Tariffs function as indirect taxes on consumers, with higher import costs often leading to inflation. These price increases could affect everything from fuel and housing to consumer goods, placing additional pressure on households and businesses alike.
On the day of the announcement, bond yields spiked, signaling market fears of rising inflation. The Fear & Green Index also turned from greed to fear following the news of President Trump’s executive order:

In Canada, the situation is particularly concerning, as the country exports a large portion of its goods to the U.S. The Bank of Montreal has revised its economic outlook, now forecasting Canadian unemployment to rise to 8% as a result of these tariffs. In response, the Canadian government has pledged “pandemic-level support” for affected businesses and workers. This likely means lower interest rates and increased money supply, which could further weaken the Canadian dollar.
The Need for Canada’s Economic Diversification
While the short-term impact of tariffs would be painful, they have exposed a critical issue: Canada has been overly reliant on the U.S. as a trade partner. Even if tariffs were not enacted, Canada will likely take steps to diversify its trade relationships.
Encouragingly, Canadian provinces are now discussing the removal of inter-provincial trade barriers, which currently add an estimated 21% cost equivalent to internal trade. Studies suggest that eliminating these barriers could boost the Canadian economy by up to $200 billion annually. This shift could help mitigate the impact of U.S. tariffs and strengthen Canada’s economic independence.
Investment Strategy Amid Uncertainty
Despite the current economic headwinds, I have decided to stay the course and hold onto my Canadian holdings. Over time, I have built strong conviction in these companies and remain confident in their ability to withstand short-term volatility.
Canadian companies like Brookfield Corporation (BN 0.00%↑), that I own, and Constellation Software (CSU.TO), that I do not own, heavily exposed to the U.S. economy and with substantial revenues in U.S. Dollars could benefit from the weakening Canadian dollar.
In contrast, Canadian lenders such as banks and sub-prime lenders may experience near-term fundamental deterioration due to higher unemployment and consumer loan delinquencies.
Final Thoughts
As an investor, my goal is to remain focused on long-term value creation. Owning high-quality businesses with durable competitive advantages and pricing power is the best strategy in times of uncertainty. If high-quality companies decline due to short-term fears, it presents attractive buying opportunities.
Economic shifts are inevitable, but human adaptability has always led to progress. While protectionist policies may create short-term disruptions and volatility in markets, history shows that people and markets adapt.
A tariff is a tax or duty imposed by a government on imported or exported goods. It is typically used to protect domestic industries, generate revenue, or influence trade policies by making foreign products more expensive.
A Power Purchase Agreement (PPA) is a long-term agreement between a renewable developer and a consumer for the purchase of energy.