March 5th, 2025: President Trump has officially implemented sweeping tariffs, placing a 25% tax on goods from Mexico and Canada, a 10% tariff on Canadian energy, and an additional 10% on Chinese imports. He claims these measures will pressure Mexico and Canada to address concerns related to undocumented migration and drug trafficking. However, while fentanyl precursors originate from China and migrants enter through the southern border, Canada plays a minimal role, accounting for just 1% of these issues.
Even The Wall Street Journal, typically a conservative voice, has condemned this move, calling it “the dumbest trade war in history.” The publication criticized Trump’s apparent belief that the U.S. can function as a self-sufficient economy, warning that such isolationist policies are unrealistic and harmful.
The Economic Fallout
These tariffs are set to have widespread economic consequences, hitting American consumers with higher prices and potential shortages of essential goods. The North American free trade agreements were designed to enhance manufacturing efficiencies and streamline the integration of the U.S., Canadian, and Mexican economies. With Canada serving as the largest supplier of steel and aluminum—crucial components in countless industries—the lack of alternative sources will create supply chain disruptions. Canadian aluminum, for example, is primarily produced in Quebec, where abundant hydroelectric power keeps costs low.
Additionally, the U.S. relies heavily on Canadian potash and auto parts, and Canada remains its top supplier of oil and gas. The auto industry, in particular, stands to suffer greatly. With deeply integrated supply chains spanning North America, vehicles often cross borders multiple times before completion. In 2024 alone, Canada accounted for 13% of U.S. auto parts imports, while Mexico supplied 42%. The industry as a whole contributes over $809 billion to the U.S. economy, supporting nearly 9.7 million jobs.
Without seamless trade, American automakers will struggle to compete globally. Other major manufacturing hubs, such as Japan, Korea, and Europe, have adopted regional integration strategies to maximize efficiency, leveraging both skilled labor and cost-effective supply chains. The U.S. has long benefited from a similar approach, with auto industry imports rising 169% from 1995 to 2019 while domestic industrial capacity also grew by 71%.
Impact on Agriculture
Agriculture will also be significantly affected. In fiscal 2024, Mexico accounted for 23% of U.S. agricultural imports, with Canada providing another 20%. Due to labor shortages in the U.S., many American growers have shifted operations to Mexico, which now supplies 90% of the avocados sold in the country. These tariffs threaten to disrupt this delicate balance, driving up food prices and straining supply chains.
Market Reaction and Economic Outlook
Following Trump’s announcement, global stock markets saw a sharp decline, while bonds surged as investors sought safe-haven assets. The Canadian dollar took a hit but managed to recover slightly. Meanwhile, WTI oil prices dropped 2% and continued their downward trend.
What’s Next?
This move is a lose-lose scenario, and Trump may be underestimating the domestic and international repercussions. Retaliatory measures are expected, and American consumers will likely feel the effects through higher prices, longer wait times for products like vehicles, and disruptions across multiple industries.
Warren Buffett has gone so far as to label these tariffs an “act of war.” Prior to this policy shift, economic growth was projected at around 2% for the year. If these tariffs remain in place for an extended period, Canada could face a recession, experiencing multiple quarters of negative growth before any recovery begins.
Given the economic downturn, the Bank of Canada is likely to step in aggressively to stabilize labor markets and overall financial conditions. With the next policy meeting on March 12, a 25 basis point rate cut is expected, bringing the overnight rate to 2.75%. Over the coming year, further rate reductions are anticipated, with an eventual target of 2.0%.
The Canadian 5-year bond yield, which influences fixed mortgage rates, has fallen to 2.51%, its lowest point in nearly three years. While lower rates may provide some support to the housing market, rising unemployment and declining consumer spending could counteract those benefits.
For those with upcoming mortgage renewals or considering refinancing, this situation raises important questions. Will rates continue to decline, or could further economic instability create volatility? Homeowners nearing renewal may want to explore their options early to secure the best possible terms, while those considering refinancing may find opportunities to lock in more favorable rates amid the current uncertainty.
