Canada and the U.S. are struggling to define the next stage in one of the largest bilateral trade relationships in the world, after trade talks between the countries broke down and new tariffs were imposed, creating uncertainty for businesses, investors and communities on both sides of the border. 

Nadim Hirji, Vice Chair, BMO Commercial Bank, North America, moderates a conversation on the breakdown in Canada-U.S. trade discussions, the economic and investment implications of newly imposed tariffs, and how companies and investors can navigate uncertainty in the trade environment. 

Panelists:  

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  Steve Verheul, Former Chief Trade Negotiator for Canada and Principal with GT

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  Michael Gregory, CFA, Deputy Chief Economist and Managing Director, BMO

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  François Trahan, M²SD, Chief Investment Strategist, BMO Capital Markets

Integrated supply chains, strong investment flows, and a shared commitment to economic growth have benefited businesses and investors on both sides of the border, Nadim Hirji noted in his opening comments. So, what’s at the root of the disagreement putting these mutual benefits at risk?

Steve Verheul said the breakdown in talks comes down to the cumulative effect of various issues that made the deal unworkable. The key sticking points were:

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  Exclusion of medium and heavy-duty trucks from tariff reductions.
  

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  The unexpected ask to exclude aluminum-containing products from tariff reductions.
  

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  Treatment of goods being imported from third-party countries and the risk of violating trade commitments with those countries.
  

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  Requirements for streaming services to promote domestic content.
  

“All of this generally would have locked Canada into a position where we would have had a very unbalanced trade relationship between Canada and the U.S.,” he said.

With the USMCA (U.S., Mexico, Canada trade pact) review process still going on outside of any bilateral talks between Canada and the U.S., Hirji wondered what other issues could emerge from this dispute. Verheul said USMCA discussions are now in question, and he does not anticipate wider negotiations will resume anytime soon.

Verheul expects Canada will redouble its efforts toward economic diversification, particularly around energy markets and defence spending. While Verheul said the most desirable outcome would be for both sides to de-escalate and begin rebuilding the relationship with support from businesses and investors, he does not see a quick resolution on the horizon.

The trade dispute comes at a time when both Canada and the U.S. economies are actually showing some positive momentum. Recent data out of the U.S. show GDP growth up 1.5% but with final domestic demand topping 3% in the second quarter, partially due to the buildout of AI infrastructure, explained Michael Gregory. He expects Canada will also show stronger growth when it releases its next report, following a period of weak economic performance.

However, the trade dispute will have a noticeable effect on Canada, he noted. “Canada is going to feel the impact of the U.S. tariffs in terms of sales in the U.S.,” Gregory said. The tariffs could shave about half a percent off the country’s GDP, he said, although, some of that could be offset to the extent Canadians switch spending to domestic production and the government provides support.

Still, while Canada’s tariffs will have negligible effect on the overall U.S. economy, Gregory said the focused nature of the tariffs targeting things like seafood, particularly shellfish, and alcoholic beverages will be felt in the U.S. “This is going to hurt both sides of the border economically,” he said.

In the near term, based on current economic signals, François Trahan expects the trade dispute will be incrementally hawkish for Federal Reserve policy. It is the opposite story for Canada where he thinks the dispute will encourage the Bank of Canada to adopt a more dovish policy stance.

From an asset allocation perspective, Trahan said the trade dispute is a marginal negative for U.S. equities, particularly the S&P 500, given the benchmark now holds more growth stocks, which are sensitive to higher inflation. The dispute is a marginal negative for bonds for the same reason, he said.

While the tariffs being lobbed across the 49^th parallel are creating a great deal of uncertainty right now, Verheul expects pressure from the business community will compel both nations to find a solution.

There is a great deal of public support for the USMCA in the U.S. business community, he said.

“There’s no real value in alienating your largest investor and your largest trading partner – there's no upside to that,” he said. “Eventually, I think those kinds of pressures will come to bear, and I hope sooner rather than later.”