Trade war with the U.S. begins: The latest state of play on tariffs, markets, economy, government support
THE CANADIAN PRESS-Stefani Reynolds/Pool/ABACAPRESS.COM
I don’t need to tell you this has been a tumultuous week.
But let’s try to recap. Here’s the state of play on the tariff situation as of 6 a.m. on March 8, based on my best effort to make sense of it all.
On Tuesday, President Donald Trump launched a trade war with the U.S.’s two largest trading partners, imposing 25% tariffs on most goods from Canada and Mexico. Energy imports face a lower 10% levy
Trump also signed an executive order doubling tariffs on China to 20%
The new U.S. administration is justifying these duties on the grounds of border security, particularly fentanyl shipments into the U.S. and illegal immigration. Nobody buys the excuse. (And keep in mind, next month the U.S. government is poised to roll out a whole new set of tariffs over other issues — trade deficits, currency manipulation and lack of trade reciprocity)
On Wednesday, Trump indicated he will temporarily exempt automakers from the 25% tariffs for one month to give the industry more time to adjust
On Thursday, two days after the border-related tariffs took effect, Trump granted Canada and Mexico a temporary, one-month reprieve on all goods deemed “compliant” with the free trade agreement between the three countries. He also lowered the effective duty on Canadian potash — a key fertilizer for American farmers — to 10%. Meanwhile, the tariffs on China remain in force
It gets messier. A significant portion of trade between Canada, Mexico and the U.S. does not comply with the United States Mexico Canada Agreement. Applying USMCA rules is complicated, and many exporters have been opting to pay low tariffs rather than determine whether a product is compliant
The Associated Press reported that roughly 60% of imports from Canada are not USMCA-compliant, and about half of imports from Mexico. All to say, the reprieve is not really a reprieve for everyone. But the new tariffs are creating a massive incentive for companies to ensure compliance. For example, the Mexican government estimates that up to 90% of its exports to the U.S. will remain exempt, at least for the next month
Because the 25% tariffs will still apply in many instances, the Canadian government has said it will maintain its first round of retaliatory tariffs on $30 billion worth of U.S. goods. However, it has paused a second round of planned tariffs on an additional $125 billion. Ontario Premier Doug Ford, meanwhile, has said the one-month reprieve won’t change his plans to impose a 25% surcharge on electricity exports to the U.S., starting Monday
But that’s not all. As mentioned above, Trump has threatened to impose reciprocal tariffs on a country-by-country basis starting April 2. During an Oval Office press conference yesterday, he even said he may impose immediate tariffs on Canadian dairy and lumber. The U.S. is also likely to target Canada’s digital sales tax—largely paid by U.S. tech giants—and has threatened to retaliate against countries like Canada who have a value-added tax system, which Trump sees as unfair to U.S. exporters
Also, to pile on, the U.S. will remove Canada’s exemption from the 25% tariff on steel and aluminum imports on March 12. So there’s that too
I think that covers most of it.
The Bigger Picture
While some still hope this is just a negotiating tactic for a new trade deal, it’s clear that we are at a historic inflection point in our trading relationship with the U.S. Trump is clearly intent on ending Canada’s privileged, duty-free access to the world’s largest economy. That will require some significant structural adjustments on our end. Hopefully, the coming federal election will prove an opportunity to have an important debate about what that would look like. And we’ll do our best at Means & Ways to keep on top of good ideas.
But until then, let’s continue taking stock of latest developments.
Markets fall. Volatility and uncertainty are starting to take a toll. The S&P 500 fell 3.1% this week, its worse week since September, amid concerns of a weakening U.S. economy, trade wars, and rising geopolitical tensions. The Nasdaq Composite was down 3.5% and the U.S. dollar had its worst week since 2022. Canada’s benchmark stock index was down 2.5% this week, while the Canadian dollar posted a small gain.
Profit warning. This uncertainty is likely to become a major drag on Canada’s economy in the coming months. A recent KPMG Canada survey of 602 business leaders found that 30% predict “significant profit losses” if the tariff war lasts more than a year, while 3% fear their companies will go out of business. About half of respondents said they are already reducing production and laying off employees in anticipation of further tariffs. Even beyond the direct impact, policy uncertainty in Canada is at record levels, and that alone is likely to dampen investment.
Pre-tariff boost. However, there may be a temporary pre-tariff boost. Businesses are accelerating shipments southward to beat the new levies. Statistics Canada reported this week that exports to the U.S. rose 7.5% in January and have surged 22% since October. Canada recorded a record trade surplus of $14.4 billion in January with the U.S., as American buyers rushed to stockpile Canadian goods.
Jobs data. Statistics Canada’s latest employment report, released Friday, showed that the labour market stalled in February. However, this comes after three months of strong growth. So we haven’t seen a major economic deterioration — yet.
Rate cut. The Bank of Canada will have more to say on the latest tariff developments at a policy decision this coming Wednesday. Governor Tiff Macklem has already been quite eloquent about the challenges ahead for Canada’s economy, and the central bank’s limitations in the face of a trade war. His last speech is worth reading on the subject. He’s widely expected to cut interest rates by another quarter percentage next week
Government support. The Canadian government announced several measures to help workers and businesses affected by the ongoing trade war: $5 billion to help exporters reach new markets beyond the U.S., $1 billion in new financing to address cash flow challenges for farmers, and relaxed employment insurance rules to improve worker access to benefits
Foreign investment. In an unusual move, the government is also tightening foreign investment rules — ostensibly targeting U.S. companies for the first time in recent memory. A new “economic security” test will now apply to foreign acquisitions of Canadian businesses, to prevent opportunistic takeovers of firms hurt by U.S. trade actions. As Innovation Minister François-Philippe Champagne put it on X: “As a result of a rapidly shifting trade environment, some Canadian businesses could see their valuations decline, making them susceptible to opportunistic or predatory investment behavior by non-Canadians.”
New Liberal leader. By the time you read the next Means & Ways, the Liberals will have a new leader and the country will have a new prime minister. We may also be at the beginning of an election campaign. So things won’t slow down. More on that next week!
