Within days of the U.S. introducing sweeping 25% tariffs targeting US$150 billion worth of goods from Canada, with lower rates on energy, the Trump administration has quickly walked back many of those measures.   

Initially, the U.S. offered a reprieve to the auto sector, only to turn around a day later to agree to pause tariffs until April 2 on Canadian and Mexican goods covered by the USCMA. Following the U.S. announcement, Canada said it would hold off on launching the second phase of its counter-tariffs, but the first phase, which affects US$30 billion in U.S. goods, remains in place.   

Businesses are trying to make sense of tariffs and how they can prepare for the potential impact on their operations. To provide some insights into the rapidly changing economic environment, I recently moderated the digital event Leading Through Uncertainty: Navigating the Impacts of U.S. Tariffs on Canada, featuring experts from BMO Capital Markets: Shelly Kaushik, Vice President & Senior Economist, Jason Giovannetti, Director & Head of Canadian Commercial FX Sales, and Swaroop Shenoi, Vice President of Global Trade.   

Our panelists discussed the potential impact tariffs could have on the Canadian and U.S. economies and how businesses can offset their risk. Below is a summary of our conversation. Also, click here to listen to a Markets Plus podcast episode based on the panel discussion.   

The focus on tariffs overshadows what Shelly Kaushik said would have been a good news story for Canada. The latest growth data showed the economy accelerating at a 2.6% annualized rate, while the Bank of Canada’s (BoC) recent rate cuts have helped firm up the labour market. Any positive performance is now in jeopardy.  

“The tariffs are a game changer,” she said. “The actual impact on the Canadian economy is going to depend on a number of things, including the timing of any exemptions and exactly how long the tariff measures last.”   

The BMO Economics team’s initial read on the situation is that if the tariffs remain in place for a year, it will lower Canadian GDP to 0.5%, down from the 1.8% BMO projected overall in 2025. That could mean a moderate recession, but that could change quickly.  

As Kaushik explained, the impact of the tariffs and associated countermeasures could lead to a temporary rise in inflation that lasts as long as the tariffs remain in place or give companies cover to push prices even higher, which would have a more meaningful, lasting impact on inflation.   

At the same time, there is downside risk to growth, which could cause the BoC to cut rates, while the U.S. Federal Reserve is under less pressure to lower its rates. She said that if the policy rates between Canada and the U.S. continue to diverge, it could push the loonie downward.   

The U.S. dollar’s strength versus the Canadian dollar is already hitting the importers hard, said Jason Giovannetti. Since the U.S. election, the greenback has appreciated by 5%. If the tariffs remain in place, it could cost Canadians $1.50 to buy the U.S. currency – up from the $1.43 it is today.   

When you combine the effect of the 25% tariff and the appreciation of the U.S. dollar, it has a compounding effect that could increase the cost of imported goods by between 40% and 45%, he explained.   

Giovannetti said he’s been having many conversations on risk management as companies consider the impact the tariffs and the exchange rate will have on their profit margins.   

From both an importer and an exporter perspective, Giovannetti said it might be prudent to put some risk management policies in place for your foreign exchange exposure if currencies have a major impact on your business. One approach some businesses may want to consider is to lock in the exchange rate.   

Although buying U.S. dollars at $1.43 or $1.44 may not be ideal from a historical perspective, he said it could help some businesses offset their currency risk. “If you’re worried about us going to $1.50 or you don’t know if you’re going to stay in business if we go up to $1.60, then locking in your currency rate is not a bad idea.”  

Given the potential risks from the scale and broad-based nature of U.S. tariffs, many companies are re-examining their business plans and developing strategies to offset the risk to their operations.  

Canadian companies are working collaboratively with their suppliers to split some of the higher costs, explained Swaroop Shenoi, although that’s happening on an industry-by-industry basis. At the same time, some businesses are looking to diversify their supply chains. Shenoi said that while diversifying supply chains is nothing new, there is a greater sense of urgency.    

“This is not going to be an overnight kind of situation, but clients have started these conversations with us,” said Shenoi. “The good news is that there are a lot of options out there for clients to leverage as they talk with their suppliers and explore potential options.”  

Shenoi said he’s telling clients to use this opportunity to look through their supply chains and telling customers to find ways to drive efficiency. If you’re onboarding new clients, expanding into new jurisdictions, or considering new suppliers, remember to talk with your relationship manager to understand if there may be any impacts on your working capital. Apart from the financing solutions available through BMO, Export Development Canada has also stepped up to offer more programs to mitigate any impacts these tariffs may have. Businesses will have to remain agile and adjust as the situation evolves. As Shenoi noted, “There is no playbook here.”   

There are now several tariff-related dates to watch. U.S. duties on steel and aluminum, which will affect Canadian producers, could come into force on March 12. April 2 is the other key date, as that’s not only the date when the 25% tariff on Canada and Mexico is slated to return but also when the U.S. could impose reciprocal tariffs. We have a Cross Border Perspectives hub to inform you of these key dates and what to watch.   

There are other factors to pay attention to as well. Canada will get a new prime minister, with the Federal Liberal Party electing a new leader on March 9. We’re also watching the fiscal developments in the United States, which is dealing with the economic fallout from the DOGE cuts and the potential for a government shutdown later this month. Perhaps Kaushik said it best during our conversation: “There’s no shortage of excitement right now.”   

Listen to the Markets Plus episode