Trade Uncertainty, Not Tariff Size is the Primary Risk from the New U.S. Tariffs
Chris Koltek - Aug 27, 2026
The biggest risk from the latest Canada-U.S. tariffs may not be the tariffs themselves, but the uncertainty they create.
On August 22nd the United States imposed a 50% tariff on close to $20 billion of Canadian goods, representing about 5% of Canadian annual exports to the U.S. [i] The tariffs cover motor vehicles, alcohol, and dairy, plus smaller sectors such as furniture, cement, clothing, and fishing and hockey equipment. Potash, energy, and critical minerals were generally excluded from the new proclamations.
Canada has responded with dollar-for-dollar retaliation, effective September 8th, on U.S. steel, dairy, agricultural equipment and more.
Implications for Canada
While the industries affected are important within certain regions and communities, the new measures currently apply to only a small portion of Canada’s total exports to the U.S. and an even smaller share of Canada’s overall economic activity. This distinction is important because market headlines often imply economy-wide effects that may ultimately prove much larger than the actual direct impact.
For Canada, tariffs on approximately 5% of annual exports to the U.S. are manageable at the economy-wide level. However, the impact could be significant for affected industries and companies whose businesses depend heavily on U.S. demand.
Companies in the named sectors whose sales run largely through the U.S. market will face a direct hit to their U.S. sales. Lower export volumes, thinner margins, and weaker investment are all likely implications for companies whose business models depend heavily on U.S. demand. Continued pressure could lead to reduced employment in these sectors, particularly for companies unable to diversify into other regions or sectors.
Even companies outside the directly targeted sectors may experience indirect effects through supply-chain disruptions, changing input costs, and altered consumer demand patterns.
The new tariffs also raise significant questions about what comes next not only for the relationship between Canada and the U.S. but for other countries negotiating trade deals with the U.S.
Uncertainty carries an economic cost that is distinct from, and often more persistent than the tariff rate itself. When the rules of a trading relationship are unsettled, businesses on both sides tend to delay capital decisions until clarity returns: a plant expansion is shelved, a supplier contract is shortened instead of renewed, or a hiring plan waits another quarter. These delays effectively act as a tax on capital allocation by discouraging investment and reducing future productive capacity. In practical terms, the economic cost may be measured by projects that are postponed, facilities that are never built, and productivity improvements that never materialize.
Previous trade disputes, including earlier Canada-U.S. tariff episodes and the U.S.-China trade tensions in 2018, have demonstrated that markets typically adjust more quickly than underlying business investment. Financial markets tend to price in tariff announcements rapidly, while capital spending, hiring plans, and supply-chain adjustments can unfold over several quarters or years.
Three paths from here
- A negotiated de-escalation where talks resume, some of the tariffs are rolled back or exempted, and both Canada and the U.S. can claim victory. Markets would likely prefer this path, but it doesn’t undo the tension of the past week.
- Tariffs and counter-tariffs continue, both measures stay in place and sector-specific carve-outs are negotiated at the margin rather than a comprehensive resolution. We view this as the most likely outcome over the next several quarters.
- Broader escalation where additional tariffs are implemented, a CUSMA review is pulled into the dispute, and litigation layers a legal risk on top of the economic risk. This is a tail scenario, not a base case, but cannot be ignored as the retaliation scheduled for September 8th raises the odds of more back-and-forth measures.
Canada Life Investment Management Portfolio Considerations
In equities, our managed portfolios continue to be positioned with a slight underweight to Canada relative to benchmark. We believe Canadian companies with lower U.S. revenue exposure, stronger pricing power, and less reliance on cross-border supply chains are generally better positioned to withstand a prolonged period of tariff-related friction. Stock and manager selection will be key factors for investment returns moving forward.
In fixed income, high-quality bonds continue to play a stabilizing role in our diversified portfolios, though tariff-driven inflation risks layered on top of elevated yields warrant continued attention to duration positioning and global diversification. Credit spreads remain relatively tight as well, demanding a disciplined approach to corporate bond exposure.
As a team, we will be watching for further tariff or exemption announcements, the implementation of the September 8th tariffs, Canada-U.S. yield spreads, and the relative returns between Canadian and U.S. equities to start.
The primary challenge may not be portfolio construction but distinguishing between short-term headlines and long-term investment outcomes. Trade disputes can generate significant market and media attention but may not change long-term investment outlooks.
The new tariffs are meaningful, but the second-order effects may matter more than the initial impact. Markets can adapt to higher tariff costs when rules are known but struggle more when the rules continue to change.
History suggests that uncertainty, rather than the tariff rate itself, often leaves the more lasting mark on investment, productivity, and economic growth. We believe the key risk is not simply slower trade, but slower investment, weaker productivity growth, and a higher cost of capital resulting from prolonged policy uncertainty. In that environment, diversification, disciplined security selection, and a long-term investment perspective