Trump's Canada Tariffs: Why Unpriced Market Risks Are Brewing a Storm

The escalating U.S.-Canada tariff dispute, now set to impose a 35% blanket tariff on non-USMCA-compliant Canadian goods starting August 1, 2025, has created a critical inflection point for investors. While markets have reacted episodically to tariff threats—most recently sending U.S. stock futures lower and gold prices higher—the broader implications for Canadian equities, currency, and vulnerable sectors remain underappreciated. CIBC economists warn that these risks are not yet fully priced into markets, presenting a short-term opportunity for strategic selling or hedging.

The Tariff Timeline: From Bluster to Reality

President Trump's April 2 announcement of a 35% tariff on Canadian goods marked a dramatic escalation from earlier 15-25% threats. The timeline reveals a pattern of escalation and unresolved uncertainty:
- April 2, 2025: 35% tariff declared for non-USMCA goods, alongside 50% tariffs on steel/aluminum and copper.
- July 10, 2025: Deadline extended to August 1, but terms remain ambiguous, including whether USMCA exemptions will persist.
- July 31, 2025: U.S. Court of International Trade appeals hearing could invalidate tariffs entirely.

Historical market reactions underscore the volatility. After April's announcement, global equities fell sharply, oil prices dropped 10%, and the Canadian dollar plunged to C$1.45—a 12-year low—before rebounding to C$1.36 by mid-July. Yet CIBC's Avery Shenfeld notes: “The market has yet to fully digest the persistence of these tariffs beyond their initial shock. If the August 1 deadline holds, we could see deeper repricing.”

CIBC's Case: Tariffs Are Still a Black Swan

CIBC's analysis argues that Canadian equities and currency remain overvalued relative to the risks posed by prolonged tariffs. Key points:
1. TSX Exposure: Over 75% of Canadian exports go to the U.S., making the TSX Composite Index (CAD:TSX) exceptionally vulnerable.
-
- The TSX has underperformed the S&P 500 by 4% since April, but CIBC sees further downside if tariffs bite.

1. Currency Undervaluation Lag: While the Canadian dollar has rebounded from its April lows, CIBC forecasts it could weaken to C$1.45 by year-end if trade tensions persist.

3. Sector-Specific Downside:

4. Metals/Minerals: Copper, steel, and aluminum producers (e.g., First Quantum Minerals, Cameco) face direct 50% tariffs, eroding margins.
5. Automotive: 25% tariffs on auto parts (e.g., Magna International, Linamar) could reduce exports by 10-15%, per CIBC.
6. Energy: Oil prices have already dropped 10% due to global demand fears, with no tariff relief in sight.

Why Markets Haven't Priced This In—Yet

Investors may be overlooking three critical factors:
1. Legal Uncertainty: The July 31 court ruling could invalidate tariffs entirely, but markets are not pricing this binary risk. A “no tariffs” outcome could spark a CAD rally, but a loss for the U.S. government would force a reset.
2. Political Dynamics: While Trump threatens escalation, CIBC notes bipartisan U.S. business pressure to avoid a trade war with its largest ally. A negotiated rollback by year-end remains plausible but is not yet reflected in asset prices.
3. Supply Chain Repricing: Companies like Rio Tinto and Suncor Energy have yet to detail contingency plans for tariff-affected supply chains, leaving operational risks unaccounted for.

Investment Strategy: Short-Term Caution, Long-Term Opportunism

CIBC's warning suggests two actionable steps:

1. Short-Term Hedging

• Sell TSX-exposed equities: Consider reducing positions in Canadian banks (e.g., Royal Bank, TD Bank) and resource stocks.
• CAD Currency Shorts: Use currency forwards or options to bet on further CAD weakness.
• Sector Avoidance: Metals/mining and autos are the most exposed; avoid until clarity on USMCA exemptions.

2. Long-Term Opportunities

• Buy on a Tariff Rollback: If negotiations succeed by late 2025, CAD and TSX could rebound sharply.
• Dividend Plays: Defensive sectors like utilities (e.g., Hydro One) and telecoms (e.g., BCE) offer stability amid volatility.

Conclusion: The Clock Is Ticking

With the August 1 deadline looming and a court ruling in 20 days, markets face a pivotal test. CIBC's assertion—that tariffs are still unpriced—is supported by historical underperformance lag and sector-specific vulnerabilities. Investors should treat this as a high-conviction risk-off environment: prioritize liquidity, hedge Canadian exposure, and await clearer signals before re-engaging. As Shenfeld concludes, “The worst-case scenario is priced in only if tariffs become permanent. Until then, caution—and preparation—are paramount.”

Data sources: CIBC Economic Outlook, U.S. Trade Representative Office, Bank of Canada.