What the US-Canada Trade War Teaches Us About Diversification

It’s also completely upended the political discourse in this country. Our upcoming election was supposed to be a referendum on the Liberal Party of Canada, but it’s been transformed into a single issue: Which politician can best protect our economy from our neighbours to the south?

It’s also been a real-time class on how to stand up to a bully. In a trade war, the only real weapon we have against tariffs is to tariff them back. Retaliatory tariffs aim to harm the aggressor’s economy and cause enough pain amongst their citizens to, hopefully, pressure their politicians to back off. Nobody wins a trade war, but if you don’t retaliate and just let someone tariff you and get away with it, there’s no incentive for the aggressor to stop, so we really have no choice if we want this trade war to end.

The problem is, due to the relative difference in the size of our countries, even if Canada were to impose dollar-for-dollar retaliatory tariffs on the US, the effect of our tariffs on their economy doesn’t carry the same punch as theirs do. Economists estimated that if the US puts 25% tariffs on Canadian goods, our GDP would shrink by about 2.5%. If we put retaliatory tariffs in place, their GDP would also shrink, by not nearly as much.

However, the same dynamic exists with the US trade relationship with Mexico. US tariffs on Mexico would also instantly spin Mexico into a recession, but a Mexican counter-punch doesn’t have the same effect on the US.

The only strategy that makes sense, therefore, is for Canada and Mexico to link arms and say “If you tariff us, we will both tariff you back at the same time.” Added together, Canada and Mexico’s retaliatory tariffs will likely spin the US into a recession, but only if we stand together and coordinate our response.

It’s a diplomatic strategy popularized in the Hunger Games trilogy known as “If we burn, you burn with us.”

Pictured: Diplomacy

So that’s basically what Canada and Mexico did last week. We both threatened combined retaliatory tariffs on the US, the stock market dove fearing a coming recession, and in the end, Trump backed off.

But this doesn’t stave off the threat forever. At best, this has earned us a reprieve. In a little less than a month, we’re back arguing about the same shit once again. And frankly, even if the US president took tariffs with Canada and Mexico off the table, there’s nothing stopping the US from threatening us later over any perceived slight, real or imagined.

So that’s why the buzzword that’s been on every Canadian (and presumably, Mexican) mind is the D-word. No, not Donald. Not even Democracy. The D-word I’m referring to is: Diversification.

Canada has made the mistake of letting our economy become overly dependent on trade with America. By intertwining our economies, the logic went, it would make no sense for the Americans to blow up our economy, because they would be hurt as well. It was an interesting theory on paper, but unfortunately for all of us, it’s been proven to be completely wrong.

We’re scrambling now to fix this problem by building infrastructure like pipelines, railways, and ports needed to transport our resources to markets in Asia and Europe, but it will take time, and until that’s done, Canada is going to be vulnerable. By failing to anticipate a second Trump presidency and not diversifying our economy years ago, we’ve opened ourselves up to a single point of failure.

But that also opens up another question. Are we, on a personal level, sufficiently diversified in our financial lives? Are we also vulnerable to a single point of failure? And if so, how do we eliminate that single point of failure and ensure that no one event can destroy our financial lives?

Diversify Your Assets

When it comes to investments, Canadians have a nasty tendency to invest primarily in domestic assets. We invest in the Canadian stock market and Canadian bonds, all in Canadian dollars, just because it’s familiar.

This is known as Home Country Bias, and it can turn against you.

Patriotism is a good thing, but not when it comes to investments. I love Canada, but I have to be realistic: We’re just not that big. And as the world has no doubt noticed, Canada’s economy is mostly resource and trade-based, so we’re vulnerable to geopolitical risks like, say, a trade war with our biggest trading partner. It’s just not safe to put all your eggs in one basket.

That’s why we advocate for a globally diversified portfolio, that includes your home country and international markets as well. For Canadians, this means putting some eggs in Europe, Asia, and yes, even the US.

Here’s the truth. Nobody can predict what’s going to happen in the future. If someone had told me that in 2025, American would be engaging in a trade war with Canada and Mexico while Elon Musk gets to pillage the US Treasury with no consequences, I would have told that person they’re nuts. But here we are.

That’s why our equity allocation is split evenly between Canada, the US, and EAFE (Europe, Australasia, and Far East). In this trade war, things are going to get volatile in North America. So in an uncertain world, it’s best to spread your bets across geographical regions because you just never know which region will take the lead. What’s been really interesting is that the EU has responded to Trump’s tariff threats with a shrug. The EU is big enough to trade amongst themselves, and smart enough to not hand over the keys of their economy to a foreign power. Who knows? This might be the year that EAFE really does something interesting.

Diversify Your Currency

Many Canadians also keep the majority of their wealth in Canadian dollars. As the last few weeks have shown, the exchange rate can be surprisingly volatile.

The easiest way to gain exposure to the USD in your investments (without literally holding USD) is to use the ETFs in our workshop because they are currency-unhedged.

Currency-hedged funds use financial instruments like options to counteract the effects of foreign exchange in your investment returns. A currency-unhedged fund, on the other hand, holds the underlying assets in their native currency, so when you use the US Index funds like VUN or the International index funds like XEF, you are benefitting when the USD rises in value against your home currency, the CAD.

This wasn’t super intentional. When we wrote the workshop, we recommended currency unhedged funds because they tend to have lower fees. But hey, when life accidentally gives you a win, you take it, right?

Diversify Your Income

And finally, the biggest source of all-in-one-basket syndrome is people’s dependence on their job.

“But I love my job!”

“But my boss is the best!”

“They wouldn’t ever fire me!”

These are the typical responses I hear when I suggest that no matter who you are, no matter who you work for, you should never depend on your job. To which I say: sure. That’s great that you believe that. It might even be true, for now.

But ask anyone who works in the US federal government how they’re feeling about their job security right now. This is the federal government. Can you think of any job that’s more stable and recession-proof than a job in the federal government? I can’t, and yet those are the people that are staring down a layoff threat wielded by none other than the richest man in the world.

Those federal workers are feeling the same thing FIRECracker was feeling in her last job. Her company had just posted a record earnings quarter, yet they were laying people off left and right. That’s when she realized that the only person you can truly trust is yourself, and your investments. Your boss, no matter how nice they seem, can be replaced at a moment’s notice. And that new boss might just see you as a liability to get rid of.

That’s why having a portfolio generating passive income is the best defence you can build against this possibility. Even if you’re not all the way to FIRE, having your money available in a liquid format that could be sold (if necessary) in the event of a job loss is way more comforting that holding a big mortgage that needs to be fed.

Conclusion

The FI in FIRE stands for Financial Independence. And Financial Independence is the strongest possible position to be in. It means that even if your boss tells you that you’ve been made redundant, you can laugh in their face and thank them for the severance. That’s real power.

And you gain that power through diversification. If you diversify your investments, your money, and your income, no one person (or one event) can derail your plans.

It’s a lesson that Canada is just now learning. But hopefully, by seeing our mistake, you can apply that lesson to your personal finances now, before it’s too late.

Remember, safety comes from the D-word: Diversify, Diversify, Diversify.

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