Capital Insights — U.S.-Canada Tariffs: Three Scenarios and Their Implications

Capital Insights — U.S.-Canada Tariffs: Three Scenarios and Their Implications

Key Summary Points

The direct economic impact of the latest U.S.-Canada tariff escalation appears manageable.

The bigger risk is not the tariff math itself, but the duration of uncertainty and risk of further escalation.

A negotiated resolution remains the most likely outcome, but investors should assess the issue through scenarios rather than headlines.

The breakdown in U.S.-Canada trade negotiations, followed by new U.S. tariffs and Canada's retaliatory response, has understandably created a strong political and emotional reaction. Trade disputes between close partners touch issues of sovereignty, fairness, and national interest, not just economics. Markets will react and adjust to the noise created by the twists and turns of the headlines. However, we believe it is important to step back and assess the likely paths from here.

We therefore think the better approach is to frame the issue through scenarios rather than track each turn in the news cycle. The immediate economic hit still looks manageable. Even with the targeted 50% tariffs now in focus, the expected drag on Canadian GDP is less than 0.5%, the net tariff rate rises to about 6%, and 80% of Canadian exports to the U.S. remain tariff free. Any impact would likely be felt most in manufacturing-heavy provinces such as Ontario and Quebec. The bigger risk is what happens if uncertainty lingers: confidence weakens, investment decisions are delayed, and businesses begin planning around a less predictable Canada-U.S. trade relationship.

Scenario Breakdown

Scenario 1: Negotiated Resolution Following Initial Escalation

Probability: 50%

Overview: This scenario follows the now familiar Trump "TACO" pattern: negotiations break down, rhetoric escalates, tariffs are announced or imposed, markets react, and both sides return to the table within days or weeks. The episode creates volatility, but businesses treat it as a negotiating tactic rather than a lasting change in the trading relationship.

Economic Impact: Economic damage would likely be limited. Confidence rebounds as uncertainty fades, delayed spending and hiring decisions resume, and Canadian assets, including the Loonie, recover from a shallow pullback. The medium-term outlook remains largely intact, supported by the deep integration of North American supply chains.

Scenario 2: Prolonged Retaliatory Escalation

Probability: 35%

Overview: In this scenario, Canada proceeds with retaliatory tariffs and the U.S. responds in kind. Negotiations stall, political pressure rises, and a cycle of retaliation and counter-retaliation lasts for weeks or months before a compromise is eventually reached.

Economic Impact: The direct tariff impact remains contained, but uncertainty becomes more damaging. Businesses delay capital spending, hiring plans become more cautious, and foreign investors adopt a more defensive, wait-and-see stance toward Canadian assets. Some sectors and regions face more pressure, even if the national impact remains manageable.

Scenario 3: Entrenched Long-Term Tariffs

Probability: 15%

Overview: This is the low-probability but highest-consequence scenario. Elevated tariffs remain in place for an extended period and businesses begin to treat uncertainty as permanent rather than temporary.

Economic Impact: The greatest risk is the behavioural response. Companies postpone expansion plans, redirect capital, reconsider supply chains, and favour jurisdictions perceived as more predictable. Hiring slows, confidence deteriorates, and investment weakens. Over time, weaker investment would compound Canada's productivity challenges and weigh on long-term growth. Canadian assets could face a persistent valuation discount, while the Canadian dollar remains under pressure.

Bottom Line

The direct economic impact of the latest tariffs remains manageable, but the duration of uncertainty matters.

The headline numbers are not trivial, but they are also not catastrophic: the expected GDP hit is less than 0.5%, the net tariff rate rises to about 6%, and most Canadian exports to the U.S. remain tariff free. If the dispute is resolved quickly, the damage should be limited. If uncertainty persists, confidence, investment, and business behaviour become the main transmission channels to the Canadian economy and markets.

Note:
All index performance is in Canadian dollars.

IMPORTANT DISCLAIMERS
The information in this letter is derived from various sources, including CI Global Asset Management, CRA, Bloomberg, National Post, Globe and Mail, Wall Street Journal, Bloomberg, Reuters, Investment Executive, Advisor.ca, MarketWatch, Toronto Sun, The Guardian, MSN.ca and Statistics Canada at various dates. This material is provided for general information and is subject to change without notice. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances. Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Global Asset Management has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.