Alternative facts

   By Guest Blogger Ryan Lewenza

.

Kellyanne Conway was a senior Whitehouse aide for President Trump in his first term and famously stated there are “alternative facts” during a TV interview when defending a clear falsehood over Trump’s inauguration attendance.

This view of alternative facts would set the tone for Trump’s presidency, where facts, truth and honesty would be replaced with exaggerations, mistruths and outright lies. The Washington Post kept track of Trump’s mistruths and by the end of his term he had racked up over 30,000 false or misleading statements.

And these mistruths continue in Trump’s second term, particularly around his justification for the tariffs. While I agree with his concerns around unfair trade practices with some nations, I totally disagree with his prescriptions to deal with them and how poorly he’s been treating Canada, a close ally. Let’s review some of Trump’s recent statements to illustrate the point.

Does America really ‘subsidize’ Canada?

Trump says constantly that the US supports or “subsidizes” Canada by $200 billion a year. This number he’s referring to is the yearly trade balance between the US and Canada, and the $200 billion is a made up, fictional number. From the Office of the United States Trade Representative website, last year the US had a trade deficit with Canada of $63 billion. So, it’s around $60 billion, not $200 billion. There are no alternative facts!

Also, the only reason the US has a trade deficit with us is because they need and buy our oil. We ship them over 4 million barrels/day as they can’t internally produce the 20 million barrels they consume. Excluding our oil, goods trade is essentially flat between our two nations. Finally, when you include services, which is largely Canadian tourism and snowbirds spending, we’re very close to a balanced trade position with the US.

Trump also rails against Canada on our unfair tariffs, and often refers to our supply management system as a key example. To be clear, we do not charge tariffs as we have a free trade agreement with the US. There are, however, a few select cases where we do charge the US a tariff and dairy is a key one.

Our supply management system puts quotas on dairy production and help set prices. We try to support our dairy industry with this supply management system and setting a quota on what the US can sell into our market. Given our much smaller size, we try to protect our dairy farmers from the US, which have much larger farms and are prone to overproducing. The fear is the US could dump their dairy products into our markets, drive prices lower and put our Canadian dairy farmers out of business.

With the renegotiated NAFTA agreement, the US can now export up to 3.6% of their dairy products into our markets tariff free. And exporting they are – US dairy exports to Canada are up 67% over the last few years.

Now, when US dairy imports rise about this threshold, then, yes, large tariffs kick in. But this is not the full story. First, this is really the only industry we have this system for. Second, the US government also supports their farming sector in multiple ways. Funny enough, the US has a very similar system for the US sugar industry. The US government helps to set sugar prices in the US and limits foreign sugar imports by imposing steep tariffs, above set limits. Sound familiar?

So, we have a US president who is both unpredictable and is not entirely honest when he’s providing his rationales for the tariffs. I think this is what government officials are struggling with the most. They can’t figure out what he wants and how to address his concerns.

From what I can gather, President Trump sees a few key goals of the tariffs.

First, he wants to bring back jobs to the US manufacturing sector and rebuild the US industrial sector. Manufacturing jobs have steadily declined since the 1980s and 90s as seen in the chart below. He wants to force US and foreign companies to build more plants in the US.

Second, he’s trying to force other nations to lower their tariffs, and level the playing field. For example, Europe charges a 10% tariff on US auto imports (22% for pickup trucks) versus the US charging 2.5% for European imported cars, and China charges high rates on US beef and pork. These are the ‘reciprocal’ tariffs and frankly I get his point. I can’t fault him here.

US manufacturing jobs decline since 1980s and 90s

Source: US Bureau of Labor Statistics

Third, Trump and his trade officials believe this will generate billions in new tax revenues, helping to balance the budget and pay for his corporate tax cuts. Peter Navarro, Trump’s key trade advisor, is predicting the US will generate $650 billion/year in new tariff revenues, or $6 trillion over the next decade. This number is fairy dust as it assumes there will be no impact to imports and economic activity, which could be negatively impacted by these tariffs.

Here’s the problem with this simplistic, 1800s mercantilist economic approach.

What happens if these tariffs, which are upending the global trade system that has been in place for decades, ends up leading to a global recession and/or inflation surging. Will this huge experiment be worth it if the US economy and stock market collapse?

The tariffs impact the economy in two important ways.

The bad news about tariffs: higher prices, lower growth

First, they will result in higher prices. They are a tax, borne by the end consumer. Almost immediately US consumers are going to start seeing higher prices, whether it’s cars, bananas, or semiconductors. It’s not a question of if inflation will rise as a result, rather how much and how sustained. The higher inflation could then force the Federal Reserve to hike interest rates to help combat the inflationary pressures. Higher interest rates weigh on the economy and the stock market, as clearly evidenced in the big drop this week.

Second, tariffs could hurt the economy through lower economic growth. Higher prices will cause consumers to spend less. Corporations will take a big hit to their bottom line through the lower sales and higher costs and will be forced to cut staff. Case in point, Stellantis just announced they are temporarily laying off 900 workers across its North American facilities.

Nations will retaliate with their own tariffs on imported US goods, which will hurt US exports. As well, pissed off citizens will protest with their pocketbook by boycotting US products. This is already happening en masse. Canadians have reduced their trips to the US (flights are down 70% yoy to the US), snowbirds are dumping their US properties, and the Canadian government is considering cancelling a $19 billion contract of new fighter jets. This will happen around the world, which hurt US companies and businesses.

So, trying to solve one problem – the decline of US manufacturing – can lead to a number of negative reactions, thus, potentially setting the stage for a US/global recession. What good is adding a few more manufacturing jobs if people can’t afford the higher priced goods, are poorer due to their 401k’s plummeting, and the overall unemployment rate surges? Given the complexity and interconnectedness of our global economy, you can’t just try to solve one problem, without creating a host of new and likely worse outcomes. This is the crux of their economic experiment.

On the positive side, and there still are some positives, we now know what Trump’s plans are so there’s far less uncertainty today. The US/global economy is still doing well which provides some cushion against these negative shocks. The tariffs will take a little time to start showing up in price trends. We’ll likely see some big deals getting announced in the coming days/weeks, which could lead to Trump reducing or eliminating some of these tariffs. And, Trump and the US congress will now move to start implementing his pro-growth policies including the big tax cuts and deregulations, which could provide a much needed boost to the economy.

That’s Trump’s thinking and potential outcomes from his audacious tariff strategy. We’re at a pivotal point in US history and in Trump’s second term. I wish we weren’t here, but we are. Better days do lie ahead, but the next few months are going to be rocky.

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/2025/04/05/alternative-facts-3/