How could President Trump's announced tariffs impact Canadians?

Canada is bracing for potential economic disruption as Donald Trump begins his presidency for the second time.

On November 25, 2024, President Trump announced on social media that, as one of his first executive orders on January 20, 2025, he plans to impose a 25% tariff on all products imported into the United States from Canada, Mexico and other countries. On inauguration day, the goal post was moved to February 1^st.

Tariffs, which are taxes applied to goods at the time of importation, could have a massive impact on Canada, says Benjamin Reitzes, managing director of Canadian rates and macro strategist at the Bank of Montreal. “That uncertainty and the risk of those tariffs is having an impact already on Canadian businesses and how they make their decisions.”

Canada and the U.S. share an interconnected relationship with trade, investment and financial markets tied together. Economic shifts in the U.S. could have ripple effects across the Canadian economy ranging from jobs to mortgages.

A weakened Loonie and less change to go around

One of the immediate impacts of a large tariff on all Canadian goods would be on Canadian currency, Reitzes says, weakening it substantially. Experts began signaling late last year that the first few months of 2025 could be difficult for the Canadian dollar due to uncertainty around President Trump’s policy proposals.

Following Trump’s remarks on inauguration day that he was still considering imposing tariffs on Canadian goods, the Canadian dollar fell nearly 1.5% to its weakest since March 2020.  

Higher tariffs would make Canadian goods more expensive in the U.S. likely decreasing demand for Canadian exports. That reduced export activity would then reduce the amount of U.S. dollars coming into Canada, leading to a declining demand for the Canadian dollar.

Reitzes predicts that Canadians, on the whole, would be much worse as all imported goods that we buy would become more expensive. Food, for example, would take a major hit, as well as travel to the U.S.

Impact on businesses

Canadian businesses are also feeling the pressure.

A recent survey from the Canadian Federation of Independent Businesses revealed that 69% of small businesses said tariffs would lead to higher costs of doing business, and 65% said it would increase prices for consumers. Additionally, nearly 17% of small businesses fear they may need to cut staff.

Many Canadians are employed in export-driven industries. If they are hit by a tariff that could put their employment in jeopardy, which would make those companies less competitive compared to their U.S. counterparts, says Reitzes, adding that there’s no guarantee that all those businesses will be able to survive with that level of a tariff hike.

Economists predict that tariffs could be negative for the U.S., Canada and Mexico, and lead to higher inflation as goods become more expensive, job numbers fall and consumers become cautious around spending.

One risk on the economy, if tariffs are introduced, is “a much weaker growth outlook for Canada, and you probably would see the Bank of Canada cutting rates even more aggressively than the Federal Reserve, at least initially,” he adds. 

Fixed rates are flying high

According to Reitzes, a separate political risk is if the U.S. continues to experience strong growth and has more tax cuts with ongoing large deficits. That’s helped increase the term premium in the U.S., which typically results in higher yields on U.S. long-term treasury bonds.

Canadian investors, seeking higher returns, might invest in these bonds to take advantage of the elevated yields compared to Canadian bonds.

“If there’s less money falling into Canada and more into the U.S., for example, that can have an impact on Canadian rates and help pull them higher as well,” he says.

Steve Garganis, lead mortgage planner at Mortgage Architects, notes that Canada’s economy has been lagging the U.S. in the last several years, which may be a greater concern than the threat of tariffs. 

Canada closely follows the 10-year U.S. treasury—a debt security issued by the U.S. government with a maturity of ten years, he adds.

“If you look at our Canada bond yield -- which is what our fixed rates are priced from -- that hasn’t gone down,” says Garganis. “The Bank of Canada has lowered their rates several times, and yet our bond yields are going up, and that means fixed rates are going up.”

While this may not be showing up yet with mortgage rates, it will eventually, he adds.

Market share also plays a factor, however, which may sound contradictory. Given the declining number of mortgage transactions these past couple years, financial institutions have been willing “to take a bit of a haircut on their profits”.

However, with paper-thin margins, lenders can only cut that margin so low.

Over the past week, the Canadian 5-year bond yield has jumped from 2.96% up to 3.28% before falling to 3.02% Friday.

Garganis expects to see volatility in the markets for the next six months or so.

“It’s a combination of reaction to the 10-year U.S. treasury, higher jobs data from the U.S. and Canada,” he says. “This is all inflationary.”

For prospective homebuyers who can stomach fluctuations, Garganis says he would personally go with a variable rate. But, if Canadians can’t sleep at night with a variable rate, he recommends a five-year-fixed rate, or a three-year fixed rate (but only if the difference between the three-year and five-year is 0.40% or greater so that there’s a significant benefit to the lower term).

Related: Should you go with a fixed or variable mortgage?

Unfortunately, whether the tariffs will, in fact, take into effect on February 1, or how much it could rock our economy and what, in turn, our own government will respond is still yet to be seen.

Prime Minister Justin Trudeau, for instance, has publicly said that Canada will use any measures necessary to encourage Trump to reverse his plans, such as dollar-for-dollar matching tariffs on U.S. products.