For what seems like months, both Canada and the U.S. have been engaging in tense trade negotiations. Both countries want assurances, concessions and allowances, but no notable progress was made in what has become the Canada-U.S. trade war.
This weekend, those negotiations collapsed.
As a result, the U.S. moved ahead with new 50% tariffs on approximately $20 billion of Canadian exports. Canada responded by announcing dollar-for-dollar retaliatory tariffs that would begin on September 8.
For Canadian investors, there will be an impact. Tariffs can disrupt supply chains, weaken demand and raise costs. And those costs go up on both sides of the border.
Not every Canadian company is directly impacted by these latest tariffs, but multiple sectors of the market could feel the effect of this ongoing dispute.
Source: Getty Images
What changed in the Canada-U.S. trade war?
Going into the weekend, things looked positive. The U.S. even paused instituting new tariffs, claiming that an agreement was close and even reached in principle.
That optimism didn’t last.
Eventually, those talks broke down, with each side claiming to have added last-minute changes that were unacceptable.
As a result, the new 50% duties took effect on a wide variety of products. That includes wine, furniture, dairy products, cement, clothing and other categories.
More importantly, unlike the earlier round of tariffs imposed, these ones are not subject to an exemption under the current CUSMA treaty.
For investors, the concern is that the impact can spread well beyond the industries directly named in tariff announcements. That impact can show up indirectly through lower trade volumes, disrupted supply chains and weaker customer demand.
Here’s a look at some of the impacted Canadian stocks for investors to note.
Three Canadian stocks show where the risks are
The first stock that’s impacted by the Canada-U.S. trade war is Canadian National Railway (TSX:CNR). Canadian National doesn’t pay tariffs on the goods that it transports, but the railway is directly tied to the flow of goods across the continent.
That means reduced exports as a result of weaker manufacturing activity or slower cross-border trade could lead to lower freight volumes.
To be clear, Canadian National is one of the larger, more diversified railways on the continent. It has exposure to different commodities and industries. That being said, its role in Canada-U.S. trade makes it the perfect example of how tariff pressure can spread quickly beyond those directly affected companies.
Magna International (TSX:MG) is another clear example of that impact. Magna is one of the world’s largest auto-parts suppliers. In North America, Magna operates across a highly integrated North American auto industry.
It’s not uncommon for parts and vehicles to cross borders several times during the manufacturing process.
Prior to this latest escalation, Magna was already dealing with softer North American vehicle production. Another prolonged trade dispute will add more uncertainty around production volumes, costs, and customer demand.
Finally, there’s Algoma Steel Group (TSX:ASTL). In the case of Algoma Steel, the tariff impact is far more direct.
The company has already been dealing with 50% U.S. tariffs on Canadian steel. In fact, Algoma recently noted that the duties have effectively closed off its traditional U.S. market, forcing it to redirect more production toward Canadian customers.
In terms of numbers, U.S. shipments accounted for just 23% of Algoma’s steel shipments in its latest quarter. By way of comparison, U.S. shipments accounted for 54% of total steel shipments in the prior-year quarter.
That’s one of the clearest examples of how tariffs can impact businesses directly.
What should Canadian investors do now?
The latest escalation doesn’t necessarily mean that investors should consider selling those companies with exposure to the U.S.
Instead, it highlights the importance of diversification. While trade disputes can create short-term volatility, they can also create opportunities elsewhere.
Companies that have a diversified base of customers, strong pricing power and the ability to redirect products to other markets may be better equipped to handle a disruption.
In contrast, those companies that are heavily dependent on U.S. customers or cross-border supply chains could face greater pressure.
For now, Canadian investors should watch the negotiations and focus on how companies like Canadian National, Magna, and Algoma are adapting.
More importantly, the latest Canada-U.S. trade war doesn’t change the long-term potential of these businesses. It just gives investors another risk to keep on watch.
