Trump’s Tariff Talk Sparks Economic Uncertainties

U.S. President Trump has paused implementing crushing, broad-based 25% tariffs on Canada and Mexico until early March, but that doesn’t mean he is taking a break from implementing any tariffs. On February 10, President Trump announced that he would be implementing a 25% tariff on all steel and aluminum entering the U.S. This is on top of existing duties levied on Canadian metals.

The move is expected to have an oversized impact on Canada. In 2024, Canada was responsible for more than half of all aluminum imported into the U.S. Canada is also the largest source of steel imports. Of that, Ontario is the biggest steel producer in Canada, while Quebec is the largest aluminum domestic producer. 

President Trump also said he would be making another announcement soon about reciprocal tariffs in the coming days on all countries that tax imports from the U.S.

During his first term in office, President Trump slapped 25% tariffs on steel and 10% tariffs on aluminum but later backtracked on those tariffs for Canada, Mexico, and Brazil. Who can say whether the same thing will happen this time around?

What is known is that tariff threats and trade wars can undermine some businesses and hammer consumer confidence, with prolonged uncertainty expected to weaken economic activity. Should the tariffs be in place for even a year, it would reduce gross domestic product (GDP) growth by 2%  to essentially zero in 2025 and result in a mild recession. 

Can the Bank of Canada Combat Trump’s Tariffs?

Is there anything the Bank of Canada can do to help alleviate Trump’s proposed tariffs? Bank of Canada Governor Tiff Macklem has warned that economic uncertainties are posing serious challenges for central banks and that while monetary policy, including interest rate cuts, can help mitigate short-term challenges, it cannot address all challenges. 

Broad-based tariffs would most likely reduce demand for Canadian exports and increase import costs. 

The Bank of Canada has been cutting its key overnight lending rate, which impacts interest rates, since mid-2024 in an effort to spur economic growth. Most recently, in January, the Bank of Canada cut its key interest rate by 25 basis points to 3%. That was the sixth straight rate cut and brings interest rates down from 5% a year ago. 

Economists say interest rates at 3% is not low enough. Should President Trump announce 25% tariffs in early March, the Bank of Montreal predicts that the Bank of Canada will need to cut its policy rate to 1.50% by the end of 2025. Should tariffs be avoided, interest rates would fall to 2.50%. 

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Uncertainty around tariff talk will impact the economy and stocks for weeks if not months, or longer. It might be temping to go all in and make bets on sectors that are expected to do well or get hammered in a trade war. To get an in depth understanding of how a trade war impacts stocks, talk to the trading experts at Learn-To-Trade.com.

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