The U.S – Canada Trade War: Do I Need to Panic?!

When it comes to Trump tariffs and their effects on Canada, I need to be upfront with the fact that I have a difficult time being objective on this issue. As someone who grew up in a small border town, and has friends and family on both sides of the Canadian and American border, this is very personal for me. My father is now retired, but if his business were still running today, these Trump tariffs would have been a massive hit to my family’s financial stability.

So before we get to how the Trump tariffs and stocks in your portfolio, I want to highlight the following:

• Trump is illegally breaking the trade deal that he created as President back in 2018! (The UMSCA – aka “new NAFTA” was signed in 2018 and Trump called it “terrific” for all three countries, and said that it was, “the biggest trade deal in United States history.”
• Tariffs are almost always a dumb idea. They are definitely a dumb idea between two developed countries who have integrated economies. My grade 11 students understand this within a couple weeks of beginning an economics course. It’s a fact – not an opinion.
• Threatening cripplingly-high tariffs on a long-term partner is disgusting behaviour. One day the USA will need allies. Canadians are unlikely to forget this moment.
• Canada has a lower trade deficit with the USA than Germany, Japan, and Vietnam – yet no tariffs on them (yet).
• Canada has almost no trade deficit at all with the USA when services (stuff like banking, computer programming, law offices, engineering consultation, etc) are part of the equation (and why wouldn’t they be?!).
• The goods-only trade deficit is mostly oil. The USA takes that oil, refines it, then sells it all over the world. It’s a massive profit generator for the country!
• There are no subsidies from the USA to the Canadian economy. That’s not how trade deficits work. The USA buys cheap Canadian resources, and then makes them into expensive finished products. It’s a really good deal for Canada – and an outstanding deal for the USA. A subsidy is something completely different and not at all relevant to the discussion.
• The stated goal of trying to fix the suddenly world-threatening amount of drugs coming from Canada is ridiculous. The idea that more illegal goods come from Canada to the USA than vice versa is obviously untrue on its face. 
• The Chinese government must be ecstatic about this. Somehow they get to deal with tariffs that are lower than that of two American allies – who already had a free trade agreement?! They also might present Canada and Mexico with offers to maybe sell more of their goods to China. No one is happier than the folks at BYD today, as their entire supply chain remains tariff-free, unlike their competitors that manufacture in North America.

Now – to be fair – there are some areas where Canada and the USA have respectfully disagreed in the past, and reasonable people can disagree or negotiate when it comes to relatively small areas of concern such as dairy access or military funding levels. None of that has actually been mentioned in regards to these tariffs, so no one really has any idea what we’re talking about or how to satisfy any demands.

Trump (Delayed) Tariff Details

So – what is a tariff anyway?

A tariff is a tax by a government on foreign goods coming into a country. The import company (or person) pays the tax to the US federal government. In the vast majority of cases, the company then turns around and sells the imported product for a higher price (and possibly also takes a hit to their profit margin).

Trump’s tariff summary:

• A 25% tax on all imports – aside from oil. This happens on Tuesday, February 5th.
• A 10% tax on oil. This is supposed to kick in on February 18th.
• Mexico will see a 25% tax on all of its imports.
• China will get a comparatively light 10% tariff on its imports.
• Canada will respond with two-phases of tariffs in response. They will total $155 billion of US goods.
• Mexico hasn’t finalized details but announced tariffs ranging from 5% to 20% on US imports including pork, cheese, fresh produce, manufactured steel and aluminum.

If you’re wondering what we send to the USA – it’s a lot (we don’t have 2024 numbers finalized yet).

The potential fallout from U.S. tariffs looms large. If the worst-case scenario unfolds and these tariffs stay on Canadian companies for more than a month or two, economists estimate it could push Canada into a three-year recession, shave three percentage points off our GDP, and wipe out 1.5 million jobs. While forecasts vary, one thing is clear – the economic risks are significant. It would likely be even worse for Mexico.

The USA isn’t going to get off the hook easily either. Predictions range between their GDP shrinking .3% to 1%. That range doesn’t give a precise picture of the fact that counter-tariffs will be heavily targeted with the goal of inflicting maximum pain to companies that are important to Republicans’ electoral chances. I wouldn’t want to be in the US alcohol or consumer goods business right now.

American consumers are going to immediately see higher prices on agricultural goods, lumber (which means more expensive houses), gasoline (especially in the midwest), and vehicles.

When it comes to cars, the idea that the tariffs will somehow shutdown Canadian factories and move them to the USA overnight is ridiculous. What will happen is that the complex supply chains involved for North American manufacturers will get much more expensive, and consequently it will make the final product more expensive.

Vehicle companies like Toyota, BYD, Volkswagen, and Hyundai must be licking their chops at the North American car industry shooting itself in the foot. It could be that in the long-term companies do think twice about opening new factories in Canada or Mexico, since this sort of chaos is exactly what drives CEOs crazy.

I personally think that there will be significant political blowback once prices start to rise, the stock market is going to send a strong signal, and Trump will give Mexico and Canada a way out in a couple weeks. The way out will likely include some videos to be shown that say how the border is now super safe – the safest in the world – and a promise to renegotiate the very trade deal that he signed last time (and called terrific).

That said, in my predictions column a month ago, I stated that I was pretty sure some form of tariffs were going to happen. I don’t think it has anything to do with drugs and the border. There are two main reasons Trump is blowing up one of the most peaceful international partnerships of all time:

1) He wants to create long-term uncertainty in the manufacturing world and illegally (by the standards of his own trade agreement) push companies to do more manufacturing in the USA.

2) Trump needs Tariff revenue to make the budget work for the massive tax cuts he is planning.

In both instances Team Trump knows they can put tariffs on and then take them off in 6-12 months after they have accomplished both of their goals – but before inflation has risen too much. The lack of specific demands by the White House supports the theory that this really has nothing to do with national security – but Trump needs some sort of justification for these destructive tariffs. Anyone who thinks they know where this is going for sure is lying.

Trump’s Trade War and My Stock Portfolio

Despite the dark clouds on the economic horizon, the Toronto Stock Exchange (TSX) has shown surprising resilience. Since Trump first floated the idea of a 25% tariff on Canadian imports, the S&P/TSX Composite Index has barely flinched – although it did fall on Friday and will likely open lower on Monday. 

There are a few reasons  why the Toronto Stock Exchange hasn’t seen its value plummet. Those same reasons are why I think panic selling right now is not a great move. Here are a few thoughts on what the tariffs (both in the short term, and then in the long-term after the vaunted report on world trade practices comes in April) might mean for the Canadian stock market.

• Many investors continue to assume that political realities will force Trump to come to the negotiating table, and that companies have prepared for a few weeks of tariffs (stockpiled supplies etc). Therefore, the overall impact will be minimal.
• The stock market is NOT the same as the economy. The economy is going to feel a pinch – but the biggest Canadian companies are somewhat insulated. Rogers isn’t going to sell fewer phone plans. A 10% tariff isn’t really going to impact oil sales in the short term, and definitely won’t impact the amount of fossil fuels flowing through pipelines.
• The Canadian stock market is chiefly made up of companies that provide services or companies that sell commodities on world markets. Shopify provides services. The big banks and insurers provide services. Those companies shouldn’t see an immediate hit to their bottom lines. 
• Big manufacturers will take a hit – there just aren’t many of them left in Canada. Companies like Honda, GM, and Ford have large factories in Canada – but their stocks are not listed on Canadian stock exchanges.
• Small- and Medium-sized businesses will be the first to feel the pain from these tariffs. Eventually that will have “ripple-up” effects, but it won’t affect the profitability of the largest Canadian companies in the short term.
• A falling Canadian Dollar will help the Canadian economy sell goods all over the world. Consumers will feel the impact through inflation, but export-based companies will see increased demand for their products. Canada oil, potash, natural gas, etc., just get cheaper for Americans to buy the lower our dollar goes.
• The government has already said they will cut interest rates and pour fiscal stimulus in. That’s always great news for company valuations.
• Retaliatory tariffs by Canada will help a few Canadian companies on the margins as more people “buy Canadian”.
• Perhaps the biggest thing one needs to keep in mind today is that negative news has already been baked into stock market prices. In other words, the time to sell was last week or two months ago. If you’re in now, you might as well stick to your asset allocations strategy and see how it plays out.

So What Should I Do?

Sadly… When it comes to Trump tariffs and your portfolio, there probably isn’t a lot you can do. The bad news has already impacted a lot of valuations.

At this point, there seems to be no way to predict the final outcome. Trump claims that his goal is to prevent fentanyl from crossing the border. That’s likely just to satisfy the legalities of tariffs being declared. If stopping fentanyl from reaching the US is the goal, how in the world does one justify a tariff that is 250% higher on Canada than it is on China?

Consequently, the only thing we really know for sure is that Trump is solely responsible for these tariffs, and that we don’t know what his goals are. That means it’s very hard to predict the short-term and long-term consequences in regards to Canada’s economy and your portfolio. Obviously, if the economy enters a recession after 2+ months of these tariffs, it will eventually hurt the railways and the banks, etc. That said, if it’s over relatively quickly, the damage to corporations’ bottom lines should be pretty minimal.

It’s also worth noting that while Canadian stocks are valued somewhat above historical averages right now, they’re by no means as “stretched” as their US counterparts. There are many reasons for that, and I’m not saying American stocks don’t deserve their price premium – I’m just pointing out that expectations for Canadian profits weren’t sky-high before Trump tariffs came into play, so they might not have that far to fall.

Oh – one other thing worth mentioning is that we’re not really sure how this is all going to shake out when it comes to interest rates. It’s very likely that we continue to cut rates in Canada if unemployment starts to creep up as the result of a tariff-driven recession. On the other hand, if inflation rates start to go up as a result of less competition to produce goods, as well as increased costs to do almost anything, then there will be pressure to dial back those key interest rate moves.

While I confidently predicted that the Trump tariffs would come to fruition a month ago, I’m much less sure of where things are headed now. Trump has already signalled that counter-tariffs from Mexico and Canada would result in yet more tariffs being dumped on each country. This is generally how trade wars begin, and they get ugly quickly, so the potential is certainly there for really bad outcomes.

On the other hand, if Canada uses this newfound sense of purpose to lower provincial trade barriers, build better export infrastructure, and then negotiates its way out of the Trump tariffs – we could end up in a much better spot than we started. Especially if Trump raises tariffs on China and other countries around the world (thus giving us a market access advantage again).