The Canada-US Tariff War: What’s Happening Now?

Trade tensions between Canada and the United States have escalated once again, with both countries implementing retaliatory tariffs on key goods. Recent US tariffs on Canadian aluminum and steel have prompted countermeasures from the Canadian government, affecting a range of American imports. The impact has extended beyond government policy, as consumer sentiment shifts towards "buy Canadian" initiatives. The LCBO, for example, has responded by pulling American liquors from its shelves, reflecting growing economic nationalism.

For investors, these trade disputes raise critical questions about portfolio allocation. If economic relations between the two countries continue to deteriorate, will US investments remain attractive, or is it time to shift focus to ex-US markets?

Selling US Investments: What Are the Tax Implications?

For Canadian investors considering selling US assets, the tax consequences can be significant, particularly in non-registered accounts. When selling direct US-listed securities or Canadian-listed ETFs that hold US stocks, capital gains tax applies to any profits realized on the sale. Since Canada taxes capital gains at 50% of the investor’s marginal tax rate, large gains could push you into a higher tax bracket, increasing your overall tax burden.

Additionally, Canadian investors holding direct US-listed dividend-paying stocks or ETFs face a 15% withholding tax on dividends, which is typically recoverable through the Foreign Tax Credit in Canada. However, if you sell US investments and replace them with Canadian or international holdings, you may face a shift in tax treatment depending on the nature of the new investments. Canadian-listed ETFs that hold US stocks do not trigger this withholding tax directly, as it is managed within the ETF structure.

Another factor to consider is US estate tax. While this primarily affects high-net-worth individuals with significant US assets, those with over USD $60,000 in direct US-listed securities may be subject to US estate tax rules, depending on their worldwide estate value. Canadian-listed ETFs that hold US stocks are not subject to US estate tax, making them a more tax-efficient choice for certain investors.

Before making any major changes to your portfolio, it's crucial to assess the tax implications, the timing of sales, and potential opportunities for tax-loss harvesting to offset capital gains.

Historic Returns: US vs. Ex-US Markets

Over the past several decades, US equities have delivered superior returns compared to most developed markets. A key comparison is between:

• FTSE Developed All Cap Index (which includes US stocks)
• FTSE Developed All Cap ex-US Index (which excludes US stocks)

Performance Over Different Time Horizons:

Index	1-Year Return	5-Year Annualized Return	10-Year Annualized Return	1-Year Volatility	5-Year Volatility	10-Year Volatility
FTSE Developed All Cap (Incl. US)	19.2%	12.1%	11.5%	15.3%	13.2%	12.5%
FTSE Developed All Cap ex-US	15.4%	8.3%	7.2%	17.8%	15.7%	14.9%

(Data as of December 31, 2024)

Historically, US markets have outperformed due to strong corporate earnings, innovation, and a thriving technology sector. Excluding US equities from a portfolio has historically led to lower returns and higher volatility. However, with rising tariffs and shifting trade policies, some investors are wondering whether ex-US markets will start to gain ground.

While past performance is not indicative of future results, historical trends suggest that removing US investments could limit long-term growth potential.

Future Returns: US vs. Ex-US If Tariffs Persist

If tariffs remain in place for the long term, the impact on investment returns could be significant.

• US Markets: US industries that rely heavily on global trade, such as manufacturing, agriculture, and automotive, may face higher costs and declining profit margins. This could weigh on overall stock market returns. However, some domestic-focused sectors—such as technology, healthcare, and consumer services—may be more resilient, as they rely less on international supply chains and exports.
• Ex-US Markets: Countries with strong internal demand and diversified economies may experience capital inflows as investors look for alternatives to the US. Emerging markets and developed economies that maintain stable trade relationships and see trade diverted from the US could see accelerated growth. However, ex-US markets have historically underperformed the US over the long term, so the shift in returns would depend on whether global companies can replace US innovation and earnings growth.

Potential Return Scenarios:

1. Tariffs Persist Long Term: US equities may experience slower growth, but global diversification could help offset losses. Some sectors within the US may continue to thrive despite trade restrictions.
2. Tariffs Are Lifted Short Term: Markets could rally as cross-border trade recovers, benefiting US companies and leading to improved earnings and stock performance across multiple sectors.
3. Global Trade Realignment: If companies permanently adjust supply chains to tariff-friendly regions, this could create new opportunities for non-US economies to take market share from traditional US players.

Investors should weigh the potential long-term impact of tariffs against the historical strength of US markets and avoid making reactionary decisions based on short-term geopolitical concerns.

Presidential Terms and the Long-Term Impact of Tariffs

One of the key uncertainties in this debate is the US presidential election cycle. Trade policies, including tariffs, can change significantly depending on who is in office. Historically, different administrations have taken varying approaches to trade, with some favoring protectionist policies and others advocating for open markets.

If a protectionist administration remains in power, tariffs could become a long-term economic policy, leading to continued strain on global trade relationships. This could impact multinational companies reliant on exports, raising costs for businesses and consumers alike. Over time, extended tariffs may encourage corporations to shift supply chains away from heavily tariffed regions, potentially benefiting alternative markets.

Conversely, a future administration that favors free trade may look to renegotiate or remove tariffs, improving relations between Canada and the US. This could lead to renewed economic growth, greater market stability, and a stronger investment outlook for companies that suffered under trade restrictions.

For investors, making decisions based on short-term political changes can be risky. Instead of reacting to each election cycle, a long-term perspective is essential. Markets tend to adjust over time, and global diversification remains one of the best strategies to mitigate political risk and economic uncertainty.

Strategic Investment Considerations: Balancing Risk and Opportunity

When navigating the complexities of US-Canada trade tensions and potential market shifts, investors should consider the following strategies:

1. Maintain a Globally Diversified Portfolio: Avoid over-concentrating in one region based on political events. A well-diversified mix of US, Canadian, and international investments can help reduce risk and capture growth opportunities.
2. Assess Tax Implications Before Selling: Exiting US investments may trigger capital gains tax in non-registered accounts. Weigh tax costs against long-term investment benefits before making any changes.
3. Think Beyond the Current News Cycle: Markets are forward-looking and often price in political changes before they happen. Reacting to short-term news can lead to unnecessary volatility in your portfolio.
4. Emphasize Sector Diversification: A diversified portfolio across sectors helps mitigate the risks associated with political tensions and market volatility. By investing in a mix of sectors that may respond differently to trade tensions (such as technology, healthcare, and consumer staples), investors can reduce their exposure to any single sector while capturing growth opportunities.
5. Rebalance to Capture Opportunities: If market sentiment turns negative due to political concerns or other factors, it may create buying opportunities for high-quality investments at discounted prices. Regularly rebalancing your portfolio allows you to take advantage of these opportunities by adjusting your asset allocation and buying undervalued assets while maintaining alignment with your long-term goals.
6. Review Currency Risk: Holding US investments exposes Canadian investors to currency fluctuations. A weakening Canadian dollar could enhance returns on US assets, while a strengthening Loonie could reduce them.
7. Understand the Role of the US in the Global Market: The US represents a significant portion of the global equity market, accounting for approximately 55-60% of global market capitalization. Completely exiting US investments could severely limit your portfolio’s diversification, leaving it overly concentrated in other regions or asset classes. Maintaining exposure to the US market helps capture growth opportunities in one of the world's largest and most dynamic economies, balancing risk across global markets.

Conclusion

While the idea of boycotting US investments may seem like a powerful statement, history has shown that a well-diversified portfolio remains the best approach for long-term investors. The US market has historically been a strong driver of global economic growth, and completely divesting from it could mean missing out on key opportunities.

Instead of making drastic, emotionally driven portfolio changes, investors should focus on maintaining tax efficiency, sector diversification, and a long-term perspective. Political and economic uncertainties will always exist, but market cycles tend to reward patience and discipline.

Ultimately, staying informed and working with a financial professional can help you navigate the complexities of trade disputes, tariffs, and global investment trends while ensuring your portfolio remains aligned with your financial goals.

 

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The opinions expressed in this report are the opinions of the author, and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. Richardson Wealth Limited does not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license. Richardson Wealth Limited, Member Canadian Investor Protection Fund.