Renewed tariff threat

Implications for Canadian trade, economy, and investors

On Jan. 24, President Trump threatened 100% tariffs on “all Canadian goods and products coming into the U.S.A.,” linking the warning to Canada’s China engagement and the risk of Canada becoming a “drop-off port” for Chinese goods into the U.S. These developments will likely increase market uncertainty and volatility in the near term. Large market moves, however, are unlikely. Since U.S.-Canada trade is crucial to both nations, tensions are likely to ease.

Having observed multiple sudden changes in U.S. tariff policy, investors have grown used to these fluctuations and are now focusing on the primary objective of de-escalation. Notably, this resilience has already been evident in Canada’s financial markets: The Canadian stock market handily outperformed the U.S. and most other global markets in 2025 despite persistent trade noise. The S&P/TSX Composite Index finished the year up 31.7%, reflecting its heavy weighting toward Financials, Energy, and Materials companies that benefited from strong resource demand and elevated commodity prices.¹

For long-term investors, an important consideration is the potentially volatile period leading up to the mandatory United States-Mexico-Canada Agreement (USMCA) review on July 1, 2026, as well as the possibility of continued tariff threats being employed as leverage. Should the USMCA not be renewed, significant disruption to investment across North American supply chains may result.

Canada/U.S. trade and tariff implications

USMCA renegotiations remain an underappreciated market risk, particularly for Canada, and Trump’s latest rhetoric is a reminder about how difficult the discussions may be. The July 1, 2026 USMCA joint review will decide if the agreement is extended for 16 years or ends in 2036, as required by its terms.

Trade between Canada and the U.S. is the largest bilateral trade relationship in the world. The U.S. is the top global destination for Canadian exports and the third largest source of Canada’s imports. Bilateral trade in goods and services amounted to nearly $1 trillion last year.²

Trade is highly asymmetric: Canada’s exports to the U.S. comprise about one fifth of Canadian GDP, whereas U.S. exports to Canada amount to only about 1.5% of US GDP.³

The largest traded sectors include energy (oil, gas, electricity), automotive parts, machinery, agriculture, and timber. The latest threat of tariffs therefore could have significant economic impacts on Canada’s economy and key sectors in both countries. A blanket 100% tariff would be costly for the U.S., leading to disruptions in U.S. automobile production and raising prices on many goods sold in the U.S. where consumers are already concerned about affordability (e.g., the costs of electricity, lumber, building materials, and cars).

The tariffs would pose a major negative shock to Canadian GDP due to a probable sharp fall in U.S. demand for Canada’s exports.

Accordingly, it is probable that both sides will seek a de-escalation path, while still claiming leverage in the upcoming USMCA talks.

This is not just about Canada. A more “surgical” U.S. approach would be for the U.S to target any re-exports via Canada of Chinese goods. Recent research, however, suggests that such transshipments are small from Canada, though they are larger for Mexico.⁴ Sectors that are considered most relevant for Chinese transshipment include electrical machinery, automotive parts, and metal products (and potentially EVs).

One major uncertainty is how the Supreme Court will rule regarding the use of IEEPA for tariff authority. If the plaintiffs’ case is upheld, the threat of country tariffs will recede. But the threat of tariffs will not completely be removed. The Administration could still shift to sector-based tariffs as well as duties ultimately requiring Congressional approval.

The recurring re-escalation of trade and investment tools of U.S. policy will reinforce concerns that other countries could use economic or financial leverage against the U.S. Dumping U.S. Treasuries can backfire by raising global interest rates or depreciating the dollar. The dollar and Treasury market remain unmatched in legal status, liquidity, and investment benefits. Currently, there is no viable alternative.

Nevertheless, limited diversification and hedging may have an impact at the margins -occasionally leading to increased volatility and potentially moderate rises in U.S. risk and term premia, especially in the event that trade or other disputes escalate.

Finally, with Democrats now threatening to withhold their Senate support for a funding bill (due to Immigration and Customs Enforcement actions), the odds of another U.S. government shutdown are rising. The most likely market impact would be a risk-off move (higher volatility, bid for Treasuries). But such shutdowns typically have only modest and short-term impacts on market prices.

Investors should watch: USD/CAD currency and Canada risk proxies (banks/credit), North American autos/industrials with cross-border supply chains, gold, Treasuries, and term-premium sensitivity in rates.

Stephen Dover, CFA, is Franklin Templeton’s Chief Market Strategist and Head of the Franklin Templeton Investment Institute. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

Lawrence Hatheway is Global Investment Strategist – Franklin Templeton Institute.

Notes

1. Bloomberg
2. Source: USTR, Franklin Templeton Institute estimates.
3. Sources: Statistique Canada and USTR
4. Meltzer & Esper, ‘Is China Circumventing US Tariffs via Mexico and Canada?, September 2025, Brookings Institute.

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