Analysts say tariffs are coming, but the details will hold crucial clues for investors.

There is a growing likelihood that U.S. President Donald Trump will introduce a 25% tariff on Canadian goods, set to take effect on Feb. 1.

Experts caution that this could have a significant impact on trade-sensitive industries, though the auto and energy sectors might be exempt.

A trade conflict could further weaken the Canadian dollar, potentially counteracting the inflationary pressures of the tariffs.

As market participants nervously anticipate U.S. President Donald Trump’s decision on punitive tariffs against Canada, analysts urge investors to distinguish between speculation and substantive developments. The proposed 25% tariff on Canadian exports could take effect as soon as Feb. 1, potentially aiming to address the reported USD 250 billion trade deficit with Canada.

What to Watch

While most economists believe the worst-case scenario is unlikely, its occurrence could severely impact the Canadian economy and its global competitiveness. Additionally, Canadian investors with exposure to the most vulnerable industries and sectors could face significant risks if cross-border trade disruptions escalate.

Industries at Risk

Industries where the U.S. can easily source domestic or alternative foreign suppliers face higher risks. Colin White, CEO of Verecan Group of Companies, explains that sectors like auto manufacturing, where parts frequently cross borders, may be spared from harsh tariffs due to potential disruptions for U.S. consumers and workers. In contrast, industries such as agriculture and poultry could be more vulnerable if the U.S. believes it can meet domestic demand.

While broad tariffs could negatively impact energy and auto sectors, they are also likely to be exempt. “Auto parts often cross borders multiple times before becoming part of a finished vehicle, with around 70% of Michigan-manufactured auto parts destined for Canada and Mexico,” notes Nicola Wealth portfolio manager Ben Jang. Years of free trade have created deeply integrated supply chains, making auto tariffs mutually damaging for both countries.

Similarly, Jang points out that Canadian energy accounts for roughly 60% of U.S. imports, as American refineries are designed to process heavy Canadian crude rather than the lighter crude produced domestically. Taxing Canadian energy could lead to significant inflationary effects for U.S. consumers. Meanwhile, he highlights that food, chemicals, machinery, aerospace, and timber industries would also be impacted by tariffs.

Other Potential Exemptions

Certain sectors related to national security could be excluded from tariffs, particularly those vital to U.S. interests. According to Jang, these may include “uranium used in power plants and weapons, and potash used in fertilizers,” with Canadian production representing a significant portion of U.S. imports. Similarly, critical minerals like cobalt and graphite—key components in lithium-ion batteries—are sourced from Canada, helping the U.S. reduce reliance on countries such as China and the Democratic Republic of the Congo. Jang is optimistic that any tariffs imposed on Canadian goods will be designed to minimize unintended repercussions for U.S. businesses and consumers.

White, however, advises caution. While hoping for the best, he urges investors not to take Trump’s tariff threat too seriously. “These announcements often involve a lot of dramatic rhetoric, akin to a professional wrestling match, rather than solid economic policy,” he states. “Investors shouldn’t overreact to political grandstanding but instead stay focused on the broader reality that the global economy will adapt and find a way forward.”

Potential Benefits for Investors

While a trade war is never ideal, and escalating tariffs can heighten tensions, there may be some upside for Canadian investors. One potential silver lining is the depreciation of the Canadian dollar, which could help mitigate some of the inflationary effects. “A weaker loonie would soften the impact, as it would help keep prices lower,” explains Adatia. He also advises Canadian investors to consider U.S. equity investments, which not only offer exposure to a strong U.S. economy but also benefit from a stronger U.S. dollar.

For homebuyers, there could be a potential break from high mortgage rates. “The Bank of Canada may cut interest rates further if they believe the economy is struggling,” Adatia adds. For equity investors, it’s essential to evaluate whether any tariffs will be permanent. “If they’re temporary, there could be a buying opportunity during any market dips,” he suggests. “If the tariffs are more permanent, valuations may need to be adjusted to account for the increased costs.”

White, however, isn’t particularly concerned about tariffs, regardless of their scale. “If your investments are well-diversified, new tariffs shouldn’t be a major worry,” he says. “Tariffs rise and fall, and a well-allocated portfolio can handle these fluctuations over time.”