Canada-U.S. Tariff Tensions: What You Need to Know
Starting February 1, the U.S. has imposed a 25% tariff on Canadian goods. This move has sparked concern about a potential trade war, with significant consequences for both economies. Here’s a breakdown of the situation and its possible impacts.
What’s Happening?
- U.S. Accusations & Tariffs:
The White House has labeled Canada as partly responsible for issues like illegal fentanyl trafficking and unauthorized border crossings. While U.S. officials point to these concerns, the numbers tell a different story—Canada’s share in these problems is relatively small compared to other sources. Nonetheless, the new 25% tariff is moving forward into effect. - Canada’s Response:
Prime Minister Trudeau has vowed a “forceful” counterpunch. Although details are still emerging, Canada may impose retaliatory tariffs and other economic measures, potentially raising costs for both businesses and consumers. - A Casual Scene Amid Concerns:
As I type this, sipping my Canadian-brewed Tim Hortons coffee,(ahem, not US Starbucks) and I don’t particularly like Tim Hortons by the way. I can hear conversations about these tariffs all around me—even among older generations, who are clearly concerned about what this means for their future. - The Trade Logic doesn’t add up:
It’s worth noting that while Canada has the second-lowest trade deficit compared to China (which holds the highest deficit), the U.S. is only pushing toward a 10% tariff on Chinese goods. This disparity in tariff levels raises questions about the logic behind these moves. - Bank of Canada’s Recent Move:
In what is their first major decision amid these brewing trade tensions, the Bank of Canada cut its overnight interest rate by a quarter percentage point. Along with other several Central Banks. This easing is welcome for borrowers but comes with a caution: a “storm may be coming” if the trade conflict escalates.
Economic Impacts
- Rising Costs & Reduced Exports:
With tariffs acting as an added tax on Canadian goods, American buyers may cut back on imports. This drop in demand could force Canadian businesses who export to the US to lower production, leading to job cuts and reduced economic activity. For example, lower prices on Canadian exports—especially in key sectors like oil—could have ripple effects across the economy. - Worried Predictions from Economists:
Some experts, including those at major banks, suggest that while there may be a temporary price hike and a weaker Canadian dollar, the full impact might not be felt until several quarters later. Yet, if the situation worsens, the economy could take a significant hit.
The Worst-Case Scenario as per the Bank of Canada
- Full-Blown Trade War:
Now that President Trump has implemented 25% tariffs on Canadian goods and there are strong indications that Canada may respond with equally sweeping retaliatory measures, the Bank of Canada outlines that this scenario could lead to:- Sharp Decline in Exports: American companies, faced with higher costs, may drastically cut back on buying Canadian products.
- Job Losses: As Canadian businesses scale down production, job losses could be significant—potentially impacting hundreds of thousands of workers.
- GDP (Gross Domestic Production) Contraction: Forecasts suggest that Canada’s GDP could fall by 2.2% to 3% compared to expected levels. Given current growth estimates of around 1.8%, this decline might tip the economy into a recession—a situation described as a “permanent recession” with no easy exit.
- Uncertain Interest Rate Outlook:
The Bank of Canada now faces a difficult balancing act. In a weak economy, they’d normally cut interest rates to stimulate spending. However, rising prices (inflation) caused by tariffs might force them to consider rate hikes instead. In other words, the tools available might work at cross-purposes, deepening uncertainty and economic volatility.
Mortgage Considerations in Uncertain Times
Given the potential economic impact of these tariff changes, it’s a good time to review your mortgage situation. Here are a few points to consider:
- Review Your Renewal Date:
If you have an upcoming mortgage renewal, now is the time to evaluate whether locking in a rate today might be beneficial in a volatile market. Never accept an early renewal offer from your current lender without speaking to a mortgage agent/broker first. - Compare Current Offers:
Let’s explore the latest rates and offers from different lenders. Even small differences in interest rates can have a significant impact over the life of your loan. - Consider a Hybrid Approach:
One strategy to manage uncertainty is to consider a hybrid mortgage approach—splitting your mortgage between a fixed rate and a variable rate. This can provide stability for a portion of your loan while allowing you to benefit from any potential rate decreases on the variable portion. - Consult Your Mortgage Agent/Broker:
Every situation is unique. If you’re feeling uncertain, schedule a consultation to review your options and get personalized advice tailored to your financial goals. - Plan for Flexibility:
Consider mortgage products that offer flexibility—non-bank lenders often provide much more flexibility compared to the big six banks, easier early renewals, more favorable penalty calculations, better prepayment privileges, and generally superior communication and responsiveness. This flexibility can help you adjust your payments and take advantage of opportunities as the economic landscape shifts - Stay Informed:
Economic conditions can change quickly. Keep up with updates and consider how broader economic trends might affect your mortgage and overall financial picture.
Bottom Line (for today)
Many of you have reached out already with valid concerns, particularly those with upcoming mortgage renewals and the ever-growing uncertainty about what to do.
I sincerely believe that it’s better to sweat in times of peace rather than bleed in times of war—a possible trade war, that is. With a holistic picture and careful assessment, it’s imperative to ensure you are proactive and protected.
I will be away this week in Whistler, BC, attending a private mortgage summit (non-bank sanctioned), where this topic is sure to be a hot discussion piece among industry experts and economists. I plan to take copious notes and will be ready to help you as best as I can. As always, if you have any questions or need guidance, please don’t hesitate to reach out—I’m here to help.
I will be back on Monday Feb 10th click here to book a time to connect.