A long four years

   By Guest Blogger Ryan Lewenza

.

Is anyone else’s head spinning? It’s been less then three weeks since President Trump’s inauguration and to say he’s been busy with executive orders and shaking things up would be the understatement of the year.

As a quick recap, Trump’s pledged to retake the Panama Canal, stated his desire to purchase Greenland and make Canada their 51st state, offered every Federal worker (and CIA worker!) the option to resign, closed down the USAID department, initiated the process to close the Department of Education, proposed to take over Gaza and turn it into the “the Riviera of the Middle East”, announced sweeping tariffs on Mexico and Canada, and then in the last minute, did a U-turn by announcing a 30 day pause of the tariffs. So, in a word, chaos!

Obviously to us Canadians, the tariffs are the most distressing and the problem is we have no idea what the big guy wants. Initially he complained about a fictional $200 billion trade deficit or “subsidy”. Then it was all about illegal immigrants and drugs pouring into the US through our shared border. And just recently he objected to Canada not allowing US banks into our country, which is not accurate.

So, let’s review these grievances/rationales behind his tariff threats to see if they have any merit.

First, the whole drug and Fentanyl claim is baffling. Yes, Fentanyl is a scourge and a big problem, but not from the northern border. According to data from the US Customs and Border Protection agency, they seized 21,889 pounds of Fentanyl from the southern border last year with Canadian seizures of 43 pounds, or just 0.2% of the total. The 43 pounds is up a lot from 2023, but it’s still a fraction of what’s coming into the US from down south.

Second, US Customs reported 198,929 of what they call “land border encounters” from Canada last year. Compare that to the southern border where they recorded 2.13 million land border encounters. So, Canadian encounters represented 9% of what the US saw from the southern border.

Given these statistics, I find it puzzling why Canada seems to be getting the brunt of Trump’s ire and that he wants to apply the same 25% tariffs to both countries.

US Customs and Border Protection seizures of fentanyl

Source: US Customs and Border Protection, RBC Capital Markets

Now let’s look at Trump’s other key beef – the US/Canada trade balance. Total trade value between our two countries was roughly US$1 trillion last year. Trade consists of two components – merchandise or goods and services. Last year, Canada had a merchandise trade surplus of CAD$100 billion with the US. From the US’s perspective this is a trade deficit and what Trump hates. But this is far from the full story.

First, the only reason we have a merchandise trade surplus is because of the large amounts of oil and gas they purchase from us. Trump recently said that Canada has nothing to offer the US. Well, how about the 4.3 million barrels/day of oil that we ship to your US refiners? The US consumes over 20 million barrels/day and they produce roughly 12 million, so they require massive imports.

If Trump doesn’t want our oil, I guess they could call up Venezuela or Saudi Arabia to fill the gap. Problems with this include energy insecurity (recall the oil embargo during the 1970s), having to pay a higher price since Canadian oil trades at a discount, and their refiners are built to refine Canada’s heavy oil so they would have to spend billions to change over.

Second, when you include services, largely travel services, the trade deficit declines to CAD$80 billion, or 5% of all trade between the two. So yes, it’s a deficit with the US, but not a material one.

Canada/US merchandise trade balance

Source: Statistics Canada, Turner Investments

To further hit home this point, in the chart below you’ll see Canada’s deficit with the US is much lower than other trading nations. The US had a trade deficit of $295 billion with China and $171 billion with Mexico last year. So the question then is, why is Trump coming down so hard on us?

U.S. trade deficits with key trading partners

Source: U.S. Census and BEA

What comes next?

It now appears that his threats of tariffs have less to do with trade imbalances and more to do with immigration. Howard Lutnick, who is the Commerce Secretary, is on record saying the tariffs are a tool to create action on illegal immigration and fentanyl. With Canada and Mexico ponying up on this ($1.3 billion on the Canadian border and 10,000 soldiers at the southern border), then maybe this will satisfy Trump for the time being and he’ll pause the tariffs. Then we could see Trump push for a renegotiation of the current free trade agreement (the one he negotiated during his first term) to try to get better terms (e.g., access to Canadian dairy). If all this plays out, then just maybe we will avoid all these tariffs.

If not, and Trump does proceed with applying tariffs then the question is how long they will remain in place and what impact they will have. If tariffs are imposed and remain in place indefinitely, we could see ten, if not hundreds of thousands of job losses and our economy fall into recession. The BoC would then likely cut rates more and our dollar could fall further. I hope cooler heads will prevail but with Trump you just don’t know.

Finally, I have no issues with Trump’s America First policy. Every leader should be driven by improving the lives of their own citizens and looking after their own house. But it shouldn’t be America alone, and that’s what Trump seems to be doing here.

Canadians have fought and spilled blood with Americans on the beaches of Normandy and at the Battle of the Bulge. Newfoundlanders opened their hearts and homes to American travelers on 9/11. Recently we sent our floatplanes and firefighters to California to help put out those terrible fires.

Almost every time the US needed a little help, Canadians gladly and proudly stood up and provided that helping hand. And, for this Trump is now prepared to slap on a tariff that could have devastating consequences for our economy.

Canadians are clearly fed up and offended by this treatment from a so-called friend and ally. This is why Canadians are uniting together, pulling US products from their shelves, canceling trips down south and even booing during the national anthem at sporting events. Frankly, it’s been amazing to watch all Canadians stand up to Trump and these tariffs.

It’s not a stretch to say we’re facing an existential crisis due to these tariffs and his threats around making Canada the 51st state. This just doesn’t seem right to this Canadian, who, like Trudeau, believes “There isn’t a snowball’s chance in hell that Canada would become part of the United States,” or that we’ll back down from this fight.

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/2025/02/08/a-long-four-years/