Trump attack

Source: New York Times

   By Guest Blogger Ryan Lewenza

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‘The Donald’ has an odd fixation with sharks and being attacked by them. Remember that weird bit he did about his preference for being hypothetically electrocuted than dying from a shark attack. That was some pretty funny stuff, but you know what’s not funny, are his recent threats of slapping a 25% tariff on all Canadian imports. Today we’ll review the implications of these potential tariffs, and why we believe his threat is more bluster than reality.

Trump ignited a firestorm after he posted on Truth Social that he wil, on day one, slap a 25% tariff on all imports from Canada and Mexico, surprising everyone. Previously he had warned of a 10% tariff on all goods coming into the country and applying a 60% tariff on Chinese goods. With that post his ire seems to be more directed to his neighbours north and south of the US, than Europe and China.

Trump said these tariffs will remain in place until Canada and Mexico stem the flow of illegal immigrants and drugs coming into the US. This shocked many Canadians and our leaders as Canada accounts for next to nothing of the US’s immigration issues. Last year 13,000 illegal immigrants crossed from Canada into the US. Compare that to over 2.5 million people coming from Mexico into the US.

If he follows through with this, Canada and Mexico will surely retaliate, basically ripping up the free trade agreement we have in place, which will likely lead to higher prices and inflation.

Contrary to what Trump believes and says, countries do not pay the tariffs. US companies and importers who purchase the goods overseas pay the tariffs. So, when Walmart, for example, buys TVs from China,  it pays the tariff and can either eat this additional cost/tax or pass this cost onto consumers, through higher prices.

Obviously, a tariff on all Canadian goods could be devastating for our country. We’re an exporting nation with the US being our largest trading partner. Last year Canadian exports to the US amounted to US$438 billion with total trade between our two countries closing in on a trillion dollars annually.

As seen below, energy products, automobiles and machinery are the largest exports we ship to the US. We’re currently shipping over 4 million barrels of oil per day to the US, which represents roughly 20% of the country’s daily consumption. If they slap a tariff on oil prices, then Americans should expect to pay higher prices at the pump, exactly the opposite of what Trump campaigned on.

Top Canadian exports to the US

Source: Trading Economics

Given the importance of trade to our economy, a tariff would be terrible for our economy. Economists estimate it would shave off over 1% of GDP, and with our economy currently growing around 1%, this could easily tip us into recession. This would surely lead to job losses and in turn a hit to consumer spending.

Another hit from this tariff would be to our Canadian dollar. The CAD fell roughly 1% following the news and it could fall further in the short-term if he ultimately follows through. The belief here is a tariff would hurt our overall economy, which could then force the Bank of Canada (BoC) to cut rates even further.

But here’s the rub; lower interest rates would put further pressure on the CAD/USD, which, in turn could ignite inflation again. While we export a lot of goods to the US, we also import billions of dollars of goods. A lower Canadian dollar would increase the cost of imports, which is inflationary. So, the thinking is a tariff could actually limit how much the Bank of Canada cuts rates, as they deal with new inflationary pressures. Ultimately, it would come down to the economic hit from the tariffs and the ensuing inflationary pressures from the lower CAD that could dictate the direction of interest rates next year.

CAD/USD and the interest rate differencial between Canada and US

Source: Bloomberg, Turner Investments

Now, I don’t believe Trump will follow through with this threat and this could just be a negotiation tactic to get more concessions once he becomes President. Why do I think this?

First, he did the same thing the last time he was president. He warned of sweeping tariffs but then only implemented tariffs on a few select areas and basically used this threat to improve their position during trade negotiations. During Trump 1.0, his tariffs impacted just 13% of total imports into the US.

Second, Trump was elected largely on trying to reduce inflation and improve the lives of Americans. It was a central part of his election campaign. If a tariff war breaks out this would do the opposite as it will likely lead to higher inflation in the US.

Trump press conference on high grocery prices

Source: The Boston Globe

Finally, Trump’s new Treasury Secretary, Scott Bessent, while a supporter of tariffs is on record saying: 1) the threat of tariffs is more important than actual tariffs; and 2) if they implement tariffs they will be used gradually.

Basically, I think once Trump takes over that he’ll listen to his Treasury Secretary and other business advisors on the negative impacts of tariffs to the US consumer and economy, and that he’ll dial down the rhetoric and his position. Trade officials in the US, Canada and Mexico will have a battle royal, we’ll make more concessions on trade, immigration and other issues important to Trump, and that ultimately, we won’t see those draconian 25% tariffs on our goods.

If I’m wrong, Trump will end up regretting his decision to cut his nose to spite his face.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2024/11/30/trump-attack/