Viewpoint: A tariff-ic start to 2025?

The looming regime change in the US and the accompanying uncertainty about the returning Administration’s approach to economic policy, especially with respect to international relations and trade, has cast a significant pall over the outlook for not just the US but the entire world.

Global economic policy uncertainty index
(frequency of EPU indicators)

Shaded regions represent periods of US recession; source: Guardian Capital using data from PolicyUncertainy.com to December 2024

The potential introduction of new tariffs by the US — whether they are sweeping levies on all goods imported into the US, more targeted taxes on goods produced in those countries viewed by the incoming President as the “greatest offenders”, which include Canada and Mexico (the co-signatories of the US-Mexico-Canada Agreement (USMCA) that was negotiated during Trump’s first term) and China, or a bit of both — and the prospect of retaliation would have a significant impact on global growth given that the export of goods and services across borders accounts for roughly one-third of global output as per data from the World Bank¹.

Of course, added two-way barriers that reduce the volume of trade would carry far less sting for the US from a production standpoint than it would for its counterparts, given that the American economy is far less dependent on exports than others. In fact, of the world’s top 40 economies, exports accounted for the lowest share of gross domestic product (GDP) in 2023 in the US (11%), while countries in Europe and Southeast Asia find themselves at the other end of the spectrum and Canada (33%) and Mexico (36%) are somewhere in the middle — for its part, China (20%) is on the lower side. Even with respect to imports, the US economy (14% of GDP) is at the bottom of the list in terms of general exposure.

Imports & exports of goods & services as a share of gross domestic product
(percent)

Source: Guardian Capital using data from the World Bank for 2023

While a large and effectively closed economy like the US may not be overly reliant on trade as a driver of growth, it is still very much exposed to the global supply chain.
One of the major byproducts of the movement toward global free trade over the last three decades is that production processes have become increasingly integrated. All of the value-added to the goods & services produced within a given economy does not necessarily originate from that country.

Inputs to production of goods can be imported from one country and the resulting finished product then shipped abroad. A country’s domestically-produced goods can also be exported and serve as an input to production for a foreign-produced finished goods. Economies are intertwined and any disruptions in trade flows or increase in costs will reverberate and compound throughout the supply chain and be felt throughout the world — including the US.

So not only would Americans face higher costs on imported finished goods — of which pharmaceuticals, motor vehicles & parts, crude oil, computers and other electronics top the list² — they would also feel the impact of tariffs on an array of goods that carry the “Made in America” label.

Moreover, while the goal of tariffs may be to punish exporters and support US production, there currently are not readily-available domestically-produced substitutes for many foreign goods. Creating capacity takes time and likely will require shifting capital and labour from areas where the American economy has a competitive-advantage (making computer software, for example) to one where it is comparatively weaker versus other countries (making computer hardware). The ultimate result is that American businesses and end consumers are going to face higher costs for goods whether they are produced within the US borders or not — and it is worth highlighting that despite what may regularly be stated, it is the ones doing the importing, not the exporters, that pay the tariffs on goods shipped stateside.

Flexible exchange rates do offer a mechanism to blunt the impact of tariffs on trade, as currency depreciation will partially offset the cost hit of the tariff, but that has negative spillover effects as it makes the costs of goods & services (think tourism) imported from the US more expensive in local terms, which, in turn, reduces their demand at the expense of the American economy. A divergence of monetary and fiscal policies, where exporting countries adopt more contractionary stances in an effort to replace US demand with domestic demand, would further weigh on foreign exchange rates.

The bottom line is that if the US follows through with aggressively taxing imports, there will be material implications for not just the exporting nations, but the American economy as well, and the bigger and broader the policy, the more significant the impact — not just the immediate weaker demand and higher costs associated with the tariffs, but policy uncertainty is also likely to weigh on investment and consumption decisions as well; at the detriment to growth.

A Canadian perspective

American import tariffs would have an outsized impact on Canada and Mexico given their dependence on the US — Canada and Mexico send more than 70% and 80% of their exports stateside, respectively.

Exports of goods to the US

Source: Guardian Capital using data from the US Census Bureau and International Monetary Fund for 2023

Within the Canadian economy, there are clear areas that are more exposed to the potential impact of lost demand from American consumers and businesses — while the likelihood of further downward pressure on the Canadian dollar that would come from the imposition of tariffs would be felt broadly.

Most notably, Canada exported roughly C$150 billion worth of oil & gas to the US in 2023 and another C$80 billion in motor vehicles & parts — these tallies represented a significant share of the overall production in these industries, as an example to really emphasize the dependence on Americans, while the new pipeline expansion gives Canadian energy producers access to more international markets, it remains the case that the vast majority³ goes across our southern border and almost all of motor vehicle exports go to the US.

Canadian merchandise exports to US
(billions of Canadian dollars)

Source: Guardian Capital using data from Statistics Canada for 2023

The prospect of tariffs on the auto industry look to be particularly challenging. The integration of production processes across North America, thanks to the USMCA and North American Free Trade Agreement (NAFTA) before that, means that motor vehicle parts cross borders multiple times (estimated to be as many as 8 times⁴!) before the finished product finally ships — that means there is the potential for multiple layers of tariffs applied during the production process at a growing cost to consumers.

US new passenger vehicle imports by country
(billions of US dollars)

Source: Guardian Capital using data from the US Trade Information Administration for the year-to-September 2024*

Unsurprisingly, the parts of Canada most exposed to these key sectors are likely to feel the biggest negative impact from tariffs, and that is especially the case for the more commodity-oriented provinces such as Alberta and Saskatchewan, while the more diversified economies are comparatively insulated.

Canadian merchandise exports to US as a share of provincial gross domestic product*
(percent)

*average from 2020 to 2023; source: Guardian Capital using data from Statistics Canada

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David Onyett-Jeffries
David Onyett-Jeffries is Vice President, Economics & Multi Asset Solutions, at Guardian Capital LP (GCLP) and provides macro-economic guidance to GCLP and its affiliates—Alta Capital Management LLC and GuardCap Asset Management Limited.

¹ World Bank Group, Exports of goods and services (% of GDP), 2023. https://data.worldbank.org/indicator/NE.EXP.GNFS.ZS?end=2023&start=2023&view=map
² U.S. Census Bureau, U.S. International Trade in Goods and Services (FT900), November 2024, Release Number: CB 25-05, BEA 25-01, published Jan 7, 2025. https://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf
³ Canada Energy Regulator, Market Snapshot: Almost all Canadian crude oil exports went to the United States in 2023, Market Snapshots, Release date: 2024-08-21. https://www.cer-rec.gc.ca/en/data-analysis/energy-markets/market-snapshots/2024/market-snapshot-almost-all-canadian-crude-oil-exports-went-to-the-united-states-in-2023.html
⁴ Canadian Vehicle Manufacturers’ Association, Canada’s Auto Industry: Driving jobs, investment, and innovation, Industry, Important Facts. https://www.cvma.ca/industry/facts/

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Published: January 2025