How US Policy Changes Affect Canada’s Stock Market and Economy

Canada and the USA are not just geographical neighbours. They are also each other’s biggest trade partners. Up to US$2.5 billion worth of goods and services are exchanged daily across the US-Canadian borders.

The import and export of goods between Canada and the US support millions of jobs in both countries and contribute to their respective economies. Unfortunately, political and economic differences are stretching this mutually beneficial trade relationship to the limit.

President Donald Trump recently imposed tariffs of up to 25% on Canadian goods that are not covered by the USMCA trade pact. Despite announcing a 90-day pause on tariff increases, the “cease-fire” excludes Canada.

The tariff increase has not only led to countermeasures (including retaliatory tariffs) from Canada, but it also has the potential to have far-reaching effects on the economies of both countries. In this post, we will analyze the effect of these US policy changes on the Canadian Economy.

Impact on Import and Exports

Despite being America’s biggest trading partner, the tariff increase will make Canada’s exports to the United States more expensive and consequently less competitive. American consumers will likely go for cheaper alternatives, leading to a significant decline in the volume of exports from Canada to the United States.

On the flip side, Canada has also imposed retaliatory tariffs on goods from the US, which means imports (particularly from America) will decline as Canadian businesses and individuals look for cheaper substitutes for US goods.

However, the outlook isn’t entirely bleak for Canada as far as imports and exports are concerned. With US goods more expensive, Canadian consumers may switch to purchasing locally made alternatives to costly American products, which will help support Canadian businesses in the face of declining exports to the US.

Weaker Canadian Dollar

Declining Canadian exports will likely bounce back on the country’s currency. Generally, the US has applied tariffs to goods and services from the majority of its trading partners. This had far-reaching impacts on global exports and triggered a GDP decline across various countries.

Lower global activities reduced the demand for commodity goods, which also resulted in a decline in prices. One of the commodities affected almost immediately was oil, Canada’s biggest export. With falling oil prices and a general reduction in exports, Canada’s trade balance suffered a significant blow, leading to a depreciation of the Canadian dollar.

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Reduction in Business Investments

The increase in US tariffs on Canada will lead to a reduction in Canadian business investments. This is due to a combination of factors, including the reduction in export activities, which means Canadian businesses will make less money. The cost of investment goods such as raw materials, machinery, and equipment sourced by Canadian businesses from the United States will also increase due to retaliatory tariffs and a weakening of the Canadian dollar. Stats suggest that about half of machinery and equipment used by businesses in Canada are sourced from the United States.

Due to these factors, businesses will make lower profits as they export fewer products and spend more on importing machinery and equipment (half of which comes from the United States). This will weigh down on business investment as investors will become apprehensive about the profitability and stability of Canadian businesses that are facing tariff-related challenges.

Impact on the Canadian Stock Market

The reduced profit potential and apprehension about the stability of Canadian businesses will most likely affect the Canadian stock market. On March 4, 2025, the U.S. announced tariffs on imports from Canada and Mexico and doubled tariffs against Chinese imports.

The uncertainty that followed the announcement resulted in a volatile day of trading for Canadian stocks. Canada’s main stock index dropped by 429.57 points, or 1.7 percent, in just one day. With investor confidence in Canadian businesses declining, capital will be diverted elsewhere, leading to a further decline in the stock market.

Inflation and GDP

Over time, the reduction in business investment will affect Canada’s productivity, leading to a long-term reduction in the country’s Gross Domestic Product, which is bad for the economy. Local inflation is also likely to rise due to a combination of some of the factors identified above. The offsetting factors include:

• The increased cost of imported products (especially products imported from the US due to retaliatory tariffs)
• Supply chain disruptions
• Weakening of the Canadian dollar
• Businesses may pass the increased cost of production down to consumers

Impacts on Canadian Citizens

While businesses will be directly impacted by tariffs, Canadian citizens will eventually feel the brunt of US tariffs and Canada’s retaliatory measures in the long run. For instance, with manufacturing businesses facing less demand (due to a drop in exports) and lower investment/profit, they may begin to lay off workers.

Rising unemployment and increasing inflation mean people will have less money to spend on non-traded goods and services, including housing and fine dining. The Canadian government may introduce interventions that can partially offset the impact of these tariffs on individuals and households in the country. This can also be financed by revenues generated from retaliatory tariffs on US products and services.

The table below analyses some of the major economic metrics that have been affected by recent policy changes and tariffs.

Conclusion

Time will tell how long the current trade disagreements between the United States and its partners will last. But the impact is already being felt. Canadian companies that depend on cross-border supply chains are already facing all kinds of logistical and financial challenges. This, combined with the reduced demand for Canadian exports from US buyers and declining investments, may further slow down economic growth.

However, the effects of these policies are being felt on both sides, which means the United States may eventually reconsider its actions and slow down tariffs—hopefully before long-term damage to their respective economies.