Since Donald Trump won the election, the markets have to deal with the potential prospect of one of the most aggressive tariff policies we have seen over the last century. This has obviously made the central bank's job more challenging in terms of forecasting inflation and GDP growth which, in turn, makes it more difficult to predict the future path of interest rates. Government policies are never the lone input of major economies, but markets are paying closer attention to how tariffs could impact the general economy. This can lead to a stock market with both volatility and opportunities. Therefore, it is important to evaluate the potential outcome of these proposed tariffs and determine if they are really that bad.
Donald Trump recently proposed a 25% tariff on all goods imported from Canada and Mexico and an additional 10% tariff on Chinese imports already in place.
Taking a page out of Trump’s first term as president, the proposed tariffs on Canada and Mexico may just be temporary and serve as a negotiating tactic. Even if these tariffs are more permanent, it is important to keep in mind that the overall Canadian stock market may have some insulation to tariffs since some of our exports are actually manufactured in part outside of Canada. For example, Canadian-exported automobiles and parts, electronics and pharmaceuticals are manufactured from firms in U.S., Japan or Europe. This means they will be dealing with the tariffs. Also, the Canadian stock market is mainly comprised of service-based industries, such as financial services, internet companies, food retailers and software companies that do not have any direct exposure to tariffs since they do not physically export goods. The table below shows how the majority of companies in the Canadian stock market have limited exports to the US except for oil and precious metals.
The main concern for most Canadians is the impact of tariffs on Canadian oil as it does comprise a more sizable portion of our markets. However, U.S. reliance on Canadian energy could prevent them from proposing any permanent tariffs on this sector. Canadian energy exports account for ~1/3 of total exports to U.S. and we are a key supplier to the US. Canada supplies >50% of US crude oil imports and they lack viable alternatives. Tariffs on this sector would result in higher energy prices for Americans, which would not be an outcome the Republicans would want.
Trump’s tariffs on Canada are most likely a negotiating tactic but the additional tariffs on Chinese imports seem more realistic and may be more permanent due to the tense relationship between the two countries. Under that consideration, if the U.S. was to decouple their trading relationship with China, especially in precious metals, they would need to find another trading partner which is most likely Canada. Canada has 5x and 6x more cobalt and nickel reserves than the U.S. and produces more aluminum, graphite, indium, iron ore, and lithium.
In short, we can not take the tariffs lightly as they can have an impact on global markets. When we take a deeper dive, some countries, such as China, may have a more permanent impact while others like Canada may experience a shorter-term impact. U.S. reliance on Canada’s imports make it impractical for them to wage a long-term trade war with Canada, especially if they are looking to contain inflation and reduce their trade relationship with China.
