Tariff Anxiety: Why Markets Crumble Before Tariffs Even Hit
What hurts more? A punch or the anticipation of it? For markets, the answer is increasingly clear.
Tariffs have been used since ancient times as a policy tool for revenue generation and protectionism. There is extensive literature on their effects and a guide for markets on how to react. Economics tells us tariffs raise prices, distort trade, and create market inefficiencies, yet they always seem to destabilize the economy far beyond what theory predicts. When governments introduce policies, the details are often ambiguous. Will the tariffs apply to all provinces? Will this escalate into a trade war? Are these tariffs temporary or permanent? Will exemptions be granted? This lack of clarity creates a sense of vulnerability, leaving businesses and consumers uncertain about the future. The recent tariff announcement involving the U.S. and Canada is no different.
The 2018 trade war between the U.S. and China offers an important lesson. The U.S. imposed tariffs on approximately $350 billion worth of Chinese imports—electronics, machinery, and consumer goods—making these items more expensive for U.S. consumers and businesses. China retaliated by levying tariffs on around $100 billion worth of U.S. goods, such as soybeans, cars, and other agricultural products, hurting U.S. exporters (Fajgelbaum, Pablo). Both economies faced higher prices of goods, a decline in real income, and disruptions in supply chains following the tariffs. However, in reality, the effects of the tariffs took hold long before they were officially imposed. Investors often react more to uncertainty than to facts. It was difficult for companies to predict costs and demand for products, so they proceeded with caution. This led manufacturers to postpone new machinery purchases and reduce their workforce. The U.S. stock market saw negative reactions as investors sold off assets and reduced investment. Investors were not reacting to the tariffs themselves but to the lack of clarity surrounding them. The uncertainty created by the tariffs translated into inaction, taking effect in the form of missed opportunities and direct costs ultimately harming the very firms the tariffs were intended to protect (Egger, Peter, and Jiaqing Zhu).
Freeman Lumber, a Nova Scotian small business that sells over half of its products to the U.S., has already adapted by shipping orders early. Meanwhile, Louisbourg Seafoods, another small business in Nova Scotia that exports 50–60% of its products to the U.S., is facing shifting customer purchasing patterns, which are leading it to consider European markets (Lam, Andrew). The "Buy Canadian" movement, on the other hand, gained traction soon after the tariffs, uniting not only Canadians but also all economic agents—customers, firms, and the government. Liquor stores in British Columbia and Ontario pulled American brands such as Kentucky bourbon off the shelves. The Liquor Control Board of Ontario (LCBO) went a step further, prohibiting restaurants and firms from restocking and ordering American beers and wines. Shortly after, local businesses such as SaskMade Marketplace, a Saskatchewan company that partners with local farms and artisans to supply food and non-food items, reported a 50% increase in sales since the tariff talks (Perez, Jon).
Though booming local business theoretically strengthens local supply chains and the creation of jobs, premature consumer buying, and bulk inventory orders from firms create artificial inflation, distorting demand in ways tariffs never could. The Buy Canadian movement presents more uncertainty, as the distinction between what is truly “Canadian” and what is not is not always clear-cut. Many American brands, including Budweiser, are bottled in Canada, while others, such as Molson, a Canadian brewery, officially merged with Coors, an American corporation, in 2005 (Cecco, Leyland). This level of cross-border integration makes it difficult to classify products as purely local or foreign adding complexity to the movement and its economic outcome.
The anticipatory effects of tariffs are complemented by political sentiment. The People’s Union USA, a grassroots movement, called for an "economic blackout" on February 28th, urging consumers to refrain from spending on nonessential goods for 24 hours. Similar to the buy Canadian movement, the long-term effect of this economic blackout is unpredictable. Though a decline in sales is expected, it may also lead to more purchases as consumers stock up in anticipation of the boycott. This phenomenon is not new. Target, in the summer of 2023, saw a decline in sales following a backlash over its LGBTQ+ community support, while Goya Foods saw an increase in sales in 2020 from purchases of conservative groups, demonstrating how political sentiment drives consumer behavior, adding yet another layer of unpredictability to an already unstable market (D’Innocenzio).
The economy is destabilized when fear spreads faster than facts. The mere anticipation of policies such as tariffs causes market paralysis, pre-emptive actions, and consumer reluctance. If tariffs were out of the news tomorrow, would business be as usual or would it simply take a new form of uncertainty? Markets can price risk, but uncertainty proves far more destructive.
References
Fajgelbaum , Pablo, et al. “The ‘Bystander Effect’ of the US-China Trade War .” CEPR, 10 June 2023, cepr.org/voxeu/columns/bystander-effect-us-china-trade-war.
Egger, Peter, and Jiaqing Zhu. “The US-Chinese Trade War: An Event Study of Stock-Market Responses.” Economic-Policy.Org, 10 Oct. 2019, www.economic-policy.org/wp-content/uploads/2019/09/998_US-China-Trade-War.pdf.
Lam, Andrew. “Uncertainty around U.S. Tariffs Causing Chaos, Forcing N.S. Businesses to Adapt .” CBCnews, CBC/Radio Canada, 7 Feb. 2025, www.cbc.ca/news/canada/nova-scotia/us-tariffs-uncertainty-1.7452310.
Cecco, Leyland. “‘Buy Canadian Instead’: Businesses Vow to Fight Trump’s Tariffs across the Border.” The Guardian, Guardian News and Media, 3 Feb. 2025, www.theguardian.com/world/2025/feb/03/buy-canadian-instead-businesses-vow-to-fight-trumps-tariffs-across-the-border.
Perez, Jon. “Buy Canadian Movement Boosts SaskMade Marketplace Sales.” SaskToday.Ca, Guardian News and Media, 26 Feb. 2025, www.sasktoday.ca/north/saskatoon/buy-canadian-movement-boosts-saskmade-marketplace-sales-10289910.
D’Innocenzio, Anne, and Haleluya Hadero. “What to Know about the Feb. 28 Economic Boycott.” PBS, Public Broadcasting Service, 28 Feb. 2025, www.pbs.org/newshour/politics/what-to-know-about-the-feb-28-economic-boycott .