Navigating U.S. Tariff Impacts on Canadian Exports: Strategic Opportunities in Defensive Sectors

The escalating U.S. tariff policies on Canadian exports have created a volatile economic landscape, with Canada’s trade deficit widening and inflationary pressures intensifying. According to a report by CIBC, the imposition of 35% reciprocal tariffs on non-USMCA goods has exacerbated sectoral divergence, leaving Canadian exporters in industries like steel, aluminum, and automobiles particularly vulnerable [1]. Meanwhile, U.S. equity markets have continued to outperform, while international markets, including Germany and Hong Kong, have shown stronger valuations [2]. This divergence underscores the need for investors to adopt defensive strategies to mitigate trade-driven risks.

Sectoral Divergence and Policy Risks

CIBC’s 2025 economic outlook highlights a stark contrast in monetary policy trajectories between Canada and the U.S. While the Bank of Canada is projected to cut interest rates in July and September 2025, the Federal Reserve is expected to remain on hold until Q4, reflecting divergent labor market conditions [3]. This policy gap, compounded by U.S. tariffs, has worsened Canada’s growth outlook. For instance, annual inflation in Canada rose to 1.9% in June 2025, partly driven by durable goods prices and trade tensions [4]. CIBC warns that a 20% tariff—even with exemptions for energy and automotive sectors—could contract Canada’s GDP by 3.25%, a scenario that underscores the urgency of hedging strategies [5].

Defensive Equities: Utilities and Consumer Staples as Anchors

In response to trade uncertainties, CIBC has emphasized the importance of defensive equities. Sectors like utilities, consumer staples, and healthcare are highlighted for their resilience during economic volatility. These industries provide essential goods and services, ensuring stable cash flows regardless of trade disruptions [6]. For example, Canadian utilities benefit from regulatory cost recovery frameworks and attractive dividend yields (4–5%), making them less susceptible to tariff-driven shocks [7]. Similarly, consumer staples firms with domestic revenue streams—such as regional banks and telecommunications companies—are better insulated from cross-border trade frictions [8].

CIBC’s Pharus Perspectives further recommend ETFs like the BMO Low Volatility US Equity ETF (ZLU), which is overweight in utilities (+2.6%) and consumer staples (+4.6%), as tools to hedge against market turbulence [9]. These strategies align with broader trends, where low-volatility ETFs have outperformed during periods of geopolitical uncertainty [10].

Fixed Income: A Buffer Against Trade Volatility

Fixed income remains a cornerstone of CIBC’s 2025 portfolio strategy. High-quality bonds, particularly investment-grade corporate debt and floating-rate notes, are positioned to absorb inflationary shocks and provide stable returns [11]. Adam Ditkofsky, a CIBC Senior Portfolio Manager, advocates for shortening bond durations and prioritizing liquidity to manage credit risks amid potential margin compression from tariffs [12]. This approach is critical as global trade negotiations remain unpredictable, with U.S. trade deficits with Canada (now $25 billion) paling in comparison to those with China and Mexico [13].

Policy-Aligned Strategies for Long-Term Resilience

CIBC’s analysis also underscores the importance of diversification. Investors are advised to rebalance portfolios toward international equities in regions with improving fundamentals, such as Europe and Asia, to reduce U.S. market concentration [14]. Additionally, companies leveraging “in-country/for-country” manufacturing strategies—minimizing reliance on cross-border supply chains—are highlighted as models for mitigating tariff impacts [15].

Conclusion

The U.S.-Canada trade tensions of 2025 present significant risks, but they also open doors for strategic, defensive investing. By focusing on utilities, consumer staples, and high-quality fixed income, investors can navigate sectoral divergence and policy-driven uncertainties. As CIBC’s outlook suggests, agility and diversification will be key to preserving capital and capturing opportunities in a fragmented global economy.

Source:
[1] CIBC Comments on Canada’s July Trade Balance [https://www.marketscreener.com/news/cibc-comments-on-canada-s-july-trade-balance-ce7d59d8db8df224]
[2] Wealthwise Wisdom: Glen’s 7 Strategic Insights [https://woodgundyadvisors.cibc.com/web/glen-daniel/subscribe?lang=en_US]
[3] Cross-border monetary policy to diverge: CIBC [https://www.investmentexecutive.com/news/research-and-markets/cross-border-monetary-policy-to-diverge-cibc/]
[4] Canadian inflation edges up as trade war with US heats up [https://www.investing.com/news/economy-news/canadian-inflation-edges-up-as-trade-war-with-us-heats-up-4135757]
[5] US tariff proposals could cost Canada 3.25% of its GDP... [https://www.benefitsandpensionsmonitor.com/news/industry-news/us-tariff-proposals-could-cost-canada-325-of-its-gdp-warns-cibc/390818]
[6] Pharus Perspectives - March 2025 [https://woodgundyadvisors.cibc.com/pharus-wealth-advisory-group/blog/33289127-Pharus-Perspectives---March-2025]
[7] How industries could be affected if U.S. tariffs resume [https://www.rbccm.com/en/story/story.page?dcr=templatedata/article/story/data/2025/02/how-industries-could-be-affected-if-us-tariffs-resume]
[8] Pharus Perspectives - May 2025 [https://woodgundyadvisors.cibc.com/pharus-wealth-advisory-group/blog/33307391-Pharus-Perspectives---May-2025]
[9] Defying the Decline: 3 Top Defensive ETF Strategies [https://etfmarketinsights.com/blog/defying-the-decline-3-top-defensive-etf-strategies/]
[10] What strategies are suitable for risk-averse investors? [https://www.advisor.ca/advisor-to-go/equities-advisor-to-go/what-etfs-are-suitable-for-risk-averse-investors/]
[11] Pharus Perspectives - July 2025 [https://woodgundyadvisors.cibc.com/pharus-wealth-advisory-group/blog/33324391-Pharus-Perspectives---July-2025]
[12] 2025 Market & Economic Outlook: Q&A with Adam Ditkofsky [https://www.cibc.com/en/asset-management/insights/markets-and-economy/2025-market-economic-outlook.html]
[13] US tariff proposals could cost Canada 3.25% of its GDP... [https://www.benefitsandpensionsmonitor.com/news/industry-news/us-tariff-proposals-could-cost-canada-325-of-its-gdp-warns-cibc/390818]
[14] Wealthwise Wisdom: Glen’s 7 Strategic Insights [https://woodgundyadvisors.cibc.com/web/glen-daniel/subscribe?lang=en_US]
[15] 2025 Spring Investment Directions | BlackRock [https://www.blackrock.com/us/financial-professionals/insights/investment-directions-spring-2025]