At the time of writing, the US and Canada tariff dispute has taken a pause for the next 30 days. This allows both the US and Canadian Governments more time to work on a long-term solution. In the meantime, this uncertainly may lead businesses to hold off their expansion and hiring plans until the tariff saga is more clear.
The word “tariff” has recently become a highly discussed term. This has brought me back to memories of attending an Economics 101 course in school. Most students have learned the economic merits of theories like the“Invisible Hand” and free trade. Not many would have thought we would see tariffs of this magnitude on supposed allied nations. But, here we are!
On February 2, RBC Chief Economist, Frances Donald and Assistant Chief Economist Nathan Janzen co-authored the potential tariff impacts on the economy in their report “RBC A U.S.-Canada trade shock now in play: first economic takeaways”. This report summarizes the following points:
1. These would be the most significant trade shock since the Smoot-Hawley tariffs of the 1930s.
2. A persistent tariff of this magnitude is recessionary for Canada.
3. Canadian retaliatory measures appear designed to asymmetrically challenge the U.S economy more than the Canadian economy.
4. Canada’s manufacturing sector is most exposed, but the knock-on effects will also matter in many other indirectly exposed industries.
5. Tariffs are hitting the Canadian economy at a moment during which it is already struggling.
6. Tariffs will also be damaging to the U.S. economy.
Both Donald and Janzen also believe that any negative impacts may be softened by:
1. A weaker Canadian dollar (stronger U.S dollar).
2. An appropriate fiscal policy response:
3. A supportive monetary policy response:
A couple weeks ago, our team member, Michael Tse also commented on the tariff situation in his blog titled “How Bad Will the US Tariffs Be?”. The piece thoughtfully considers the impact of tariffs on the Canadian stock market. Ultimately, uncertainties remain and we all await future negotiations and decisions. As an investor, the key to success is to maintain a diversified portfolio that is defensive and be able to withstand a potentially weaker economy.
At RBC Dominion Securities, our team provides a “Private Investment Management” model that is designed to cushion short-term market turbulence, while capitalizing on the benefits of long-term growth and diversification. Please contact your Investment Advisor for more details.
