04:26 PM EST, 03/04/2025 (MT Newswires) -- The Toronto Stock Exchange continued its downward slide for a second day on Tuesday as Donald Trump launched his promise tariff war on the largest U.S. trading partners, while Canada immediately responds with retaliatory tariffs of its own.

The S&P/TSX Composite Index closed down 429.57 points to close the day at 24,572, shedding more than 800 points in the two losing sessions and pulling the index down 3.2% from Friday's close. The biggest declines among sectors were Financials and Technology, down 2.77% and 1.75%, respectively.

The U.S. administration moved ahead with 25% blanket tariffs on imports from Canada and Mexico, though Canadian energy will be taxed at 10%. Trump also doubled the U.S. tariff on China to 20%. Canada and China put retaliatory tariffs in place, with Canada putting tariffs on $30 billion of U.S. products, rising to $155 billion after a 21-day consultation period.

Frances Donald, chief economist at RBC, said evolving trade policies and government responses still remain highly uncertain. But, as she assesses the implications on RBC's forecasts, to be released in its Financial Markets Monthly next week, Donald provided a 'cheat sheet' summary of what is known and is being incorporated into RBC's outlook.

Donald noted market watchers have a limited experience for the magnitude of the trade shock expected from this trade war, outside of their experiences during the pandemic years. In 2018-19, tariff policies raised the average import duty from 1.5% to approximately 3%. As of Tuesday, the average tariff rate quadruples to nearly 12%. "That's the largest trade shock to the U.S. and Canada since the 1930s," Donald said.

According to Donald, the ultimate impact of these tariffs on Canada and the United States will depend on how long they, and retaliatory measures, remain in place. "Those are political decisions and difficult to economically forecast. The movement of currencies is key as well, because it can buffer some of the impact on inflation and growth on both sides of the border," she said.

As a specific timeline, RBC previously delineated a duration of three to six months to show material mark downs in growth for the Canadian and U.S. economies. Donald said tariffs would likely reduce real gross domestic product growth to zero in 2025 if implemented beyond a year and lead to a 2% contraction in 2026 with a peak unemployment rate more than 8%.

Donald noted Canada's deeply U.S-integrated manufacturing sector, accounting for about 10% of GDP, is "particularly vulnerable", along with its heartland in Ontario and Quebec. She said Alberta and New Brunswick are also among the vulnerable provinces due to their commodity exposure, but the lower tariff rate on energy implies an easier adjustment. Again, these scenarios make many assumptions about the path of currencies, retaliatory measures, central bank responses and fiscal packages, she added.

The damage, Donald noted, is already in play. Uncertainty measures are at or near all-time highs, which will weigh on business investment and hiring in Canada, she said. Surveys like the ISM Manufacturing indicator showed a surge in expectations for prices combined with a drop in new orders and employment activity in February, a stagflationary sentiment likely to reveal itself in a variety of other indicators into March, she added.

Donald noted Canadian central bankers and governments might need time to develop strategies to react. The Bank of Canada has been noncommittal in how it would respond to a tariff shock, waiting to see whether inflation or growth dominate. Without tariffs, RBC expected the BoC to gradually cut rates to 2.25%. Now, RBC expects the longer tariffs remain in play, the greater the likelihood that rates fall faster and by a larger magnitude. Provincial and federal stimulus packages will also matter, Donald added.

Donald has an eye on medium and longer-term solutions. She said: "There are longer-term plays available to facilitate export diversification and stronger domestic growth drivers despite the hurdles facing the Canadian economy. One is the U.S.'s recognition of the importance of Canadian commodities. Lower tariff rates on Canadian energy and critical minerals reveal how big a global player Canada is on oil, gas, potash, agrifood, uranium and other essentials without easy substitutes. Expanding a cross-border partnership in these areas could refocus the relationship, while underpinning a greater value capture in manufacturing and ancillary services, and greater trade diversification."

Donald added: "There is increasing consensus in Canada on the urgency of addressing structural growth impediments from interprovincial trade barriers to peer-lagging business investment and high regulatory burdens. There are no easy fixes for U.S. tariffs. These issues could only be addressed over time, but would unequivocally be positive for the Canadian economy."

Trade turbulence is likely to be a persistent theme, according to Donald. She said while the current focus is on 25% across the board tariffs on Canadian and Mexican goods, there are other trade-related deadlines coming. In addition to the planned March 12 implementation of previously announced steel and aluminum tariffs, April 2 is the next trigger date. The U.S. administration is expecting trade analysis from several agencies to support reciprocal tariffs, while its already put out a notice for stakeholder views on USMCA/CUSMA in advance of July 2026 renegotiations. "Ongoing trade disruption means both economies can expect to be beset by policy uncertainty that weighs on business investment," Donald added,

Of commodities today, West Texas Intermediate crude oil closed at a three-month low as the trade war began and OPEC+ affirmed it plans to begins returning 2.2 million barrels per day of production cuts to the market next month. WTI crude oil for April delivery closed down $0.11 to settle at US$68.26 per barrel, the lowest since Dec. 6, while May Brent crude closed down $0.58 to US$71.04.

But gold prices were up for a second day late afternoon on Tuesday in a flight to safety as the dollar fell. Gold for April delivery was last seen up $26.90 to US$2,928.00 per ounce.