Shifting trade policies and inflation trends are reshaping global economic landscape and causing increased volatility across markets worldwide. Corrado Tiralongo, Chief Investment Officer, Canada Life Investment Management Ltd, offers his insights and answers questions on the changing landscape of Canadian trade, inflation dynamics and the impacts for investors. 

1. Will Canada be impacted differently than Mexico or China under the current trade tensions?  

Yes, Canada will be impacted differently than Mexico or China due to variations in tariff exposure, economic structure, and the depth of integration with the U.S. economy.  

In a base case, where most tariffs stay around 10% and retaliation remains modest, Canada faces a relatively low direct tariff rate of 6% but still suffers a 0.7% hit to GDP over two years. This shows that even modest tariffs can have a disproportionately large impact on deeply integrated economies such as ours, especially where cross-border supply chains are so connected like the Canadian auto, manufacturing, and natural resources sectors.  

Mexico, despite a similar baseline tariff exposure (8%), is more vulnerable under escalation scenarios. If the United States-Mexico-Canada Agreement (USMCA) exemptions are revoked, Mexico could face average tariffs of 23% and a GDP contraction of nearly 5% by the end of 2026. Mexico’s economy relies heavily on low-margin manufacturing exports to the U.S., particularly in autos and electronics, which leaves it highly exposed to tariff pass-through and supply chain disruption.  

China, on the other hand, is already dealing with very high tariffs, over 145%.  Even though exports to the U.S. account for only ~3% of China’s GDP, the impact is magnified by investor sentiment, capital outflows, and currency depreciation. In the escalation scenario, U.S.-bound Chinese exports could fall by 80%, leading to a 1.7% decline in GDP, despite aggressive domestic fiscal support.  

For Canada, the path forward isn’t about decoupling from the U.S. but rather navigating around the edges of U.S. protectionism through diplomatic channels, trade diversification, and policy alignment. The risk is not necessarily from direct tariffs, but from indirect demand destruction, regional supply chain reconfiguration, and the broader uncertainty that trade fragmentation imposes on investment and capital flows.  

 Summary: 

While China bears the symbolic weight of this trade war and Mexico the highest direct risk, Canada’s vulnerability lies in its economic proximity to the U.S. making it highly sensitive to second-order effects and spillovers from broader global dislocation. Investors should take note that low tariff doesn’t mean low impact.  

2. What role does currency policy play in this trade realignment?  

Currency policy is a key tool in global trade tensions. When tariffs are imposed, the affected country often looks to currency depreciation to offset export losses and maintain competitiveness. However, this affects inflation, capital flows, and investor confidence.  

China’s currency, the renminbi has fallen to around 7.35 per U.S. dollar, its weakest level since 2007. This decline isn’t accidental —market forces are reacting to the renewed tariff escalation and slowing export momentum. But crucially, Chinese authorities haven’t allowed a full depreciation to 8.00. They’ve managed the currency lower through to avoid disorderly moves and protect financial stability.  

Effects of currency depreciation: 

• Inflation: A weaker renminbi raises the local currency cost of imports, especially energy and industrial components. While this might not translate into broad-based inflation immediately, it tightens household budgets and reduces policy flexibility. For the U.S., a weaker renminbi could partially blunt the inflationary effect of tariffs by keeping import prices in check.  
• Trade competitiveness: A cheaper renminbi helps China preserve some export share, but also exerts competitive pressure on countries like Vietnam, Mexico, and even Canada in overlapping sectors like manufacturing and machinery. It could undercut the intended effect of U.S. tariffs and shift trade flows away from U.S. aligned partners.  
• Investor sentiment: If markets think the depreciation is the start of a sustained trend, it may trigger capital outflows from China or broader emerging markets (EM)weakness. This could create global risk, especially in Asia-focused equity and credit markets.  

Key takeaways for investors: 

Currency policy is now part of the trade war arsenal not just a passive adjustment mechanism. The renminbi may not breach 8.00 in the near term, but even gradual weakening can have big effects across inflation, trade balances, and asset pricing.  

 3.  How does the BoC navigate rate policy amidst slowing growth and rising global uncertainty?  

The Bank of Canada is walking a tightrope. Domestically, growth is stalling, and there’s pressure to lower interest rates. But global trade tensions an inflation from the d U.S. make the timing difficult. The BoC’s most recent commentary suggests a reluctance to overreact, signaling rate stability barring major shocks.  

If U.S. stagflation (high inflation and low growth) risks materialize, the BoC may be forced to act pre-emptively, cutting rates to support growth. But the risk is that this coincides with imported inflation via commodity channels or FX weakness.  

For investors, this creates an environment where duration risk must be carefully managed, with a bias toward short-duration, high-quality debt and selective real return instruments.  

 4. Is China likely to pivot away from trade-driven growth entirely? What are the risks?  

China is clearly shifting from trade-led to internally driven growth, with greater reliance on fiscal stimulus, tech innovation, and consumer demand. However, this change is complicated. The 80% projected decline in U.S.-bound exports under high tariff regimes reflects a structural challenge.  

The renminbi’s managed depreciation and China's domestic support measures help cushion the near-term blow, but there's a longer-term risk because without external demand, China’s overcapacity issues could intensify.  

Why this matters for investors: 

China’s slowdown isn’t isolated, and it affects commodity demand, EM supply chains, and global sentiment. Portfolios should reflect lower China beta, with more targeted Asia exposure and attention to idiosyncratic risks.  

 5. How should investors assess risk in a world of fragmented trade and regional blocs?  

Trade is becoming more regional, with tensions between the U.S. and China, EU digital sovereignty, and reshoring in North America all point to a fractured global system. This introduces new geopolitical risks that aren't well priced in by markets today.  

What investors should do: 

In this environment, investors should look beyond traditional asset correlations. Scenarios should be modeled not just on macro fundamentals, but on geopolitical triggers like tariffs, sanctions, policy retaliation, and cross-border capital flow restrictions.  

Portfolio construction needs to evolve with greater exposure to real assets, multi-regional equities, and uncorrelated alternatives that can help guard against systemic shocks.  

 6. What sectors are most vulnerable if U.S. tariffs expand under an April 2 Day-style policy?  

If U.S. tariffs increase significantly these sectors will be hit hard: 

• Pharmaceuticals, semiconductors, copper, and lumber: could face proposed 25% blanket tariffs under the “Escalation” scenario. These sectors are central to global supply chains and disruption here could ripple through manufacturing and tech globally.  
• Autos and industrials: especially across USMCA borders, will face renewed exposure. For Canada, this could hurt regions that depend on exports and could weigh on earnings in TSX-listed names.  

What investors should do: 

Investors should evaluate geographic revenue exposure and supply chain resilience within equity allocations. Sector tilts should favor those with pricing power and domestic demand buffers.  

 7. How are emerging markets likely to perform amid trade volatility?  

Emerging markets are caught in the crossfire. Some EMs, especially in Association of Southeast Asian Nations (ASEAN), might benefit from trade diversion. But these gains may not materialize because uncertainty deters investment, and many EMs lack the scale or infrastructure to absorb displaced trade.  

In “Escalation” scenarios, EMs face lower export demand, tighter financial conditions, and currency instability — a recipe for underperformance.  

What investors should do: 

• Avoid broad EM beta  
• Focus on countries with domestic demand strength, fiscal discipline, and minimal trade dependency.  

 8. How might energy markets be impacted by continued trade fragmentation?  

Energy markets are global, but fragmentation can create supply bottlenecks, price volatility, and geopolitical risk premiums. Tariff escalation can suppress industrial demand, but retaliatory sanctions, especially involving China or Russia, can tighten supply unexpectedly.  

If trade tensions lead to slower global growth, oil demand could soften. Yet, if energy becomes a policy weapon, as it did in 2022, prices could spike on supply fears.  

For portfolios, it’s better to focus on targeted energy exposure rather than broad commodity beta. Infrastructure, pipelines, and renewable transition plays may offer more stable return profiles.  

 9. Are investors underestimating the long-term consequences of the current trade war?  

Yes, markets tend to price policy moves linearly, but trade fragmentation is a nonlinear shock. What begins as tariff skirmishes can evolve into capital flow restrictions, tech decoupling, and monetary realignments.  

The risk is not just lower growth, it’s a sustained shift in how value chains are configured and how inflation behaves. Labor market frictions, geopolitical realignment, and reduced policy coordination amplify long-term risks.  

What investors should do: 

Investors should test their portfolios against structural macro shifts, not just cyclical volatility. That means reassessing benchmarks, correlations, and traditional diversification logic.  

 10. What role do alternative investments play in this evolving environment?  

Alternatives are no longer just a way to diversify portfolio, they’re core components of resilience in a fragmented, high-volatility world.  

Examples of alternative investments: 

• Managed futures, for example, can capitalize on trend persistence across rates, commodities, and currencies — common in macro-driven regimes.  
• Private credit offers yield in an environment where bond returns are compressed by inflation volatility.  
• Real assets like infrastructure and farmland provide inflation protection and tangible cash flows.  

In today’s world, the traditional 60/40 struggles to meet risk-adjusted targets. Alternatives offer return asymmetry and downside protection that’s difficult to replicate elsewhere.  

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