The news

Nearly a year and a half into the upheaval in U.S. trade policy, tariffs have returned to the forefront after the U.S. imposed a 50% tariff under Section 338 of the Tariff Act of 1930 on roughly C$28 billion of Canadian goods, including electrical machinery, plastics, textiles, furniture, and paper products. In total, the C$28 billion of goods subject to the new levies represents approximately 5% of total Canadian exports to the U.S., based on 2025 export data.

The Section 338 tariffs will apply to all covered goods, regardless of whether a product qualifies as originating under CUSMA. In response, Prime Minister Mark Carney announced that Canada would retaliate “dollar for dollar” against the U.S. tariffs, with retaliatory tariffs set to take effect by September 8. The trade dispute could escalate further, as President Donald Trump threatened an additional 50% tariff on Canadian steel, automobiles and parts from Canada beginning January 1.

Our take

Our view is that the new tariffs create a meaningful but manageable headwind for the Canadian economy, although the effects will be felt unevenly across provinces and sectors. Industries such as plastics, electrical equipment, wood products and furniture are among those most exposed to the new tariffs. In addition, the escalation in trade tensions is likely to add to already elevated business uncertainty, potentially causing firms to delay investment.

For investors, the past year and a half has helped reinforce the importance of not overreacting to policy headlines. Since 2025, the TSX has gained over 50%, including dividends, despite the increasingly protectionist direction of U.S. trade policy. In our view, investors are best served by maintaining a well-diversified portfolio aligned with their goals and risk tolerance, rather than making portfolio shifts driven by headlines.

In this report, we unpack what the recent tariff announcement means for Canada's economy and outline implications for investors. 

Implications for Canada's economy

Canada had recently benefited from a lower effective tariff rate than many of the United States’ largest trading partners, providing it with a relative advantage. With the imposition of the Section 338 tariffs, that advantage is expected to narrow but largely persist. The Penn Wharton Budget Model estimates that the effective U.S. tariff rate on imports from Canada will rise to roughly 7%, from 4.7% before the Section 338 tariffs took effect.

Overall, we expect the newly imposed tariffs to pose a modest headwind to economic activity, both directly and through heightened uncertainty about the path forward, which could lead businesses to reduce or delay investment and hiring. Despite aggressive U.S. trade policy in 2025, the United States remained Canada's dominant export market, accounting for roughly 72.5% of Canadian goods exports. These exports totaled C$564.6 billion, equivalent to approximately 17% of Canada’s nominal GDP.

Certain industries affected by the newly implemented tariffs are even more reliant on the United States as an export destination. For example, roughly 90% of Canadian plastics exports were destined for the U.S. in 2025, while roughly 95% of Canadian furniture exports were destined for the U.S.

Beyond the direct costs, persistent uncertainty surrounding U.S. trade policy could lead Canadian businesses to defer investment and hiring, potentially creating an additional headwind for economic activity. However, Canada entered this period with signs of improving momentum. The Bank of Canada’s second-quarter Business Outlook Survey showed that the indicator of future export sales had risen to its highest level since 2022, while firms’ investment intentions reached a two-year high. These results are consistent with monthly GDP data showing that the economy expanded at a 3.1% annualized rate in the three months through May, suggesting that growth has accelerated after two consecutive quarters of modest contraction.

The bottom line, in our view, is that the newly imposed tariffs represent a meaningful but manageable headwind for the Canadian economy. Economic activity had been firming before the tariffs were introduced, and the Canadian government has pledged support for the industries most affected. However, renewed uncertainty about the direction of trade policy could weigh on business confidence and investment. Although retaliatory tariffs could place modest upward pressure on goods inflation, we believe the greater risk is to economic growth. Against this backdrop, we expect the Bank of Canada to remain on hold in the near term as it assesses the evolution and economic implications of trade policy. While downside risks have increased, our base case under the current tariff structure remains one of modest economic growth rather than recession.

Canadian stocks could prove resilient amid trade-policy uncertainty

While we expect the headwind from Section 338 tariffs to be felt from an economic standpoint, specifically among the industries most directly targeted, North American stocks have shown resilience over the past two years despite aggressive U.S. trade policy. Since the start of 2025, the TSX has gained over 50% including dividends, while the S&P 500 has rallied more than 30%.

Many of the Canadian industries most heavily targeted by the newly announced tariffs represent only a small share of the TSX. For example, companies with direct exposure to plastics, paper and forest products, and furniture collectively account for less than 1% of the index. Similarly, auto-parts companies represent roughly 0.5% of the TSX, limiting the index’s direct exposure to the higher tariffs that President Trump has threatened to impose in January 2027. While there could be downstream impacts from the businesses most exposed, these relatively small weights suggest that much of the TSX could be insulated from the brunt of the new tariffs.

By contrast, the energy and materials sectors, which together account for more than one-third of the TSX, could be relatively well positioned amid an uncertain geopolitical and trade-policy backdrop. Continued uncertainty in the Middle East could support a geopolitical risk premium in oil prices through year-end, providing a potential tailwind for Canadian energy producers. The sector may also benefit from the exemption of U.S. tariffs to Canadian energy imports. Meanwhile, the materials sector’s sizable exposure to gold producers could provide another source of support. Gold has historically served as a safe-haven asset during periods of heightened financial and geopolitical uncertainty, and an escalation in trade tensions could increase investor demand for the metal. As a result, the TSX’s significant exposure to energy and materials could offset weakness among the industries most directly affected by the tariffs.

The bottom line

Developments on trade will likely be a source of uncertainty in the weeks and months ahead. However, potential fiscal support could help offset these headwinds, while the TSX’s sector composition may limit its direct exposure to the tariffs. We recommend investors stay focused on long-term goals rather than making portfolio changes in response to short-term market volatility. Portfolios that feature asset class and geographic diversification may be less susceptible to the investment risk that could arise from an escalating trade war. We believe our opportunistic asset-allocation guidance is well-positioned for the current environment. We continue to recommend that investors consider overweighting Canadian small- and mid-cap stocks, U.S. large-cap stocks, and emerging-market equities. Although we continue to see greater opportunities in stocks than in bonds, we believe maintaining strategic bond allocations could help offset potential equity-market volatility. If you have questions about how your portfolio is positioned and how it will help you meet your personal financial goals, speak to your Edward Jones Financial Advisor.

Angelo Kourkafas, CFA
Senior Global Investment Strategist

Brock Weimer, CFA
Investment Strategy Analyst