How to Trade with Looming Tariffs

Dissention between Canada and the U.S. is nothing new. We even went to war in 1812 and set fire to the White House. In recent memory, John F. Kennedy publicly mocked Mr. Diefenbaker’s French; Lyndon Johnson grabbed Lester Pearson by his lapel for opposing the Vietnam war; and Richard Nixon was infamously recorded calling our Prime Minister “that asshole Trudeau”.

Any talk of Canada becoming the 51st state won’t lead anywhere. If it were, Canada would be one giant California-like blue state and the Republican Party would never control Congress or the White House again. If they think Mexico poses a problem, try addressing Canada’s Indigenous and francophone population.

Tariffs, however, present a more realistic threat. Trump has promised a 25% tariff on all Canadian exports. Excluding energy, Canada actually runs a trade deficit with our southern neighbours.

Nevertheless, here’s what we expect to happen.

1. There will be tariffs against Canada, but not across the board on all of our exports. In a New York Times article published earlier this week, Trump was quoted telling his Chief of Staff Susie Wiles during the campaign that his base doesn’t care much about economics. If that’s true, they probably don’t have strong views about trade deficits either. However, everyone surely has emotions about paying higher prices. A tariff on Canada’s oil and gas will surely drive up prices at the pump, something that any driver will detest.

2. Tariffs against Canada and other countries will lead to higher prices. This will force the U.S. Federal Reserve to pronounce that higher rates may be required due to the return of inflation. After all, their central bank has an apolitical mandate to maximize employment and promote price stability.

3. To combat inflation and improve his personal approval rating, Trump will eventually settle for a “win” somewhere via trade concessions from other countries, such as Canada.

We’ve lived through the Trump tariffs once before. Steel and aluminum tariffs were imposed on June 1, 2018, and then lifted on May 17, 2019, after the USMCA deal came into effect. During that ordeal from start to finish, the TSX surprisingly rose – albeit slightly – by 1.8% to 16,346 points.

For clients, we’ve recently increased our allocation to the energy sector. We believe that Canada’s oil and gas is so vital to the U.S. economy that it will be carved out from inflationary tariffs imposed by the White House.

-written by Jeff Pollock