What do tariffs mean for Canadians?

If the first weeks of Donald Trump’s second term as U.S. president are any indication, 2025 may go down in economic textbooks as the Year of the Tariff.

Understandably, you may have questions. So, we’ll try to answer them as best we can.  

What is a tariff?

Tariffs are, simply put, duties placed upon imports that make goods more expensive for the country importing them.

They are a commonly used economic instrument, but if used too aggressively, can cause financial troubles on both sides of a trade deal.

In recent decades, increased globalization has caused tariffs to fall out of favour in much of the developed world, as many countries opened their borders to trade. This includes Canada, Mexico and the U.S., which finalized their most recent free trade agreement in 2019.

How do tariffs work?

A tariff can target specific industries, such as dairy or steel, or all goods coming from a particular country.

When a country imposes a tariff, the importer has to pay the additional cost. Often, this cost is passed onto the end consumer as a price increase.

For example, if an American company imports Canadian maple syrup at $10 a litre, a 25% tariff would raise the import cost to $12.50 a litre. This could have a potential chain reaction of effects, such as:

1. The cost of Canadian maple syrup at U.S. supermarkets goes up.
2. The higher price leads to lower demand for Canadian syrup.
3. Consumers start buying up cheaper syrup from the U.S., as well as diluted or artificial maple alternatives. Pancakes just don’t taste the same.
4. Higher demand lifts the price of American maple products. The U.S. industry considers ways to boost next year’s supply.

Of course, the cause and effect of tariffs is not always so simple. There are various factors that influence the price and demand for goods. These include:

• Fluctuations in currency – is the exporting country’s currency falling? The import could still be a good deal, even with the added cost.
• Shifts toward imports from countries with lower or no tariffs.
• The amount of wiggle room on the price tag – can the importer or exporter afford to cover some of the extra cost rather than shift it to the consumer?
• The availability of substitutes and complementary goods.

What effects could big new tariffs have?

Large penalties on Canadian imports, such as those proposed by the U.S. in 2025, could have many ripple effects across both economies, depending upon how long the tariffs last.

Take it from the Bank of Canada, which says, “Tariffs affect spending, trade flows, government revenue, exchange rates, employment, gross domestic product (GDP) and inflation. They could substantially disrupt supply chains in Canada, the United States and elsewhere around the world.”

Do tariffs cause inflation?

Tariffs are most likely to trigger inflation in the country that imposes the levy on the goods coming in. “At a minimum, a permanent tariff will cause a one-time, permanent increase in price levels” on the goods that are affected, the Bank of Canada says.

In the case of the 25% tariffs initially proposed against Canada and Mexico, the Washington-based Peterson Institute estimates it would cost the average U.S. household $1,200 per year.

If Canada retaliates by imposing levies on American goods, that would likely translate into higher prices paid by Canadian consumers for many of those goods, unless cheaper alternatives can be sourced.

What would a lower dollar mean for Canadians?

The loonie has been declining against the U.S. dollar for months, partly in anticipation of tariffs.

A lower dollar makes imported goods more expensive. Travel to the United States and other countries with stronger currencies would be notably pricier, so be sure to factor the extra cost into any trips – or consider travelling within Canada.

On the other hand, a softer currency encourages visitors – and foreign investors – to bring their money here, and can give Canadian exports a boost.

 “A weaker dollar makes it somewhat easier for Canadian businesses to export their products around the world,” writes Shaun Osborne, the chief currency strategist for Scotiabank.

Would interest rates go up or down?

Such predictions can depend on a variety of factors. When inflation soared after the pandemic, central banks including the Bank of Canada (BoC) raised interest rates to cool the economy and bring inflation back down. Interest rates ticked back down again in 2024 and 2025. The BoC’s overnight rate declined to 3%, as of Jan. 29.

But tariff-induced inflation is a different animal, since it’s not caused by increased demand. And those higher prices are likely to dampen economic growth, in which case the BoC wouldn’t need to dampen it further by raising rates. According to Morningstar, if the suggested tariffs go ahead, and a prolonged trade war ensues, many economists agree that further rate cuts would be likely.

What should I do with my mortgage?

With 1.2 million mortgages up for renewal in 2025, this is a question likely on the minds of many Canadians: should you renew at a variable or fixed rate?

This often comes down to personal temperament. If you expect rates to go down or stay about the same over the coming years, and you can handle some uncertainty, consider variable. (If you become uncomfortable with the uncertainty, you can usually convert to a fixed mortgage by “locking in” to a fixed rate.)

If the idea of your rate – and possibly your payments – fluctuating keeps you up at night, consider a fixed rate mortgage.

What should I do with my investments?

Our guidance here is tried and true:

• Stay invested. Look beyond the uncertainty of this week or month, and try not to look too closely at the day-to-day. Focus on your goals. Keeping invested during short-term market dips can help keep investors on track toward their long-term investing goals.
• Diversify. A well-diversified portfolio can help mitigate risks. Tangerine’s suite of passively managed, index-based Portfolios make investing easy by diversifying across a variety of investments spanning different geographies, industries and company sizes in one convenient package¹.
• Invest regularly. Establish and maintain a disciplined approach to investing with a pre-authorized contribution (called an Automatic Savings Program at Tangerine). Regular contributions take the uncertainty out of “when” to invest by making investing automatic, helping to build potential wealth gradually over time.

Looking for guidance about your time horizon, risk appetite and investment goals? Our team of licenced advisors are here to help, Monday to Friday, from 8 a.m. to 8 p.m. ET, at 1-877-464-5678.

What should I do with my short-term savings?

If you have money sitting in savings that you may need to access in the short term, and you’re looking to earn a bit of interest, you have several options to consider at Tangerine:

• Money Market Fund – a stable, low-fee solution that aims to protect the value of your Investment even through volatile times. 💡It’s an ideal place to park any emergency savings you may need to access, since it’s easy to deposit or withdraw funds as needed without penalty.
• GICs – Hold your money in a GIC for as little as 90 days to as long as 5 years, and lock in a guaranteed interest rate for that time.

Either of these options can be placed inside a Tax-Free Savings Account. You won’t be taxed on earnings or withdrawals, as long as you stay within your contribution limits.

What’s next?

When there’s so much uncertainty in the air, you’re bound to have questions about what’s next – we all do! Hopefully we helped answer some of them. For now, we wait and watch, and try not to overreact to market noise. Headphones can help.

¹Diversification does not guarantee a profit or eliminate the risk of loss.