"The Dumbest Trade War in History”.

 

That’s what the Wall Street Journal called the 25% tariffs on Canada and Mexico that were announced by the White House on Saturday. I couldn’t agree more. There is no question that this is going to hurt the Canadian economy. The only question is how much and for how long. Make no mistake, though, that Americans will begin feeling the pinch from both higher prices for all the things they buy everyday and lost jobs. To make matters worse, our federal government is in limbo with the proroguing of Parliament leaving us even more vulnerable than normal.

 

There is no point in trying to predict what the American administration will do in the coming weeks. We do know that the chances of a recession in Canada just went up. There will be several factors that will offset the tariffs levied against Canada:

1. Canada has announced 25% tariffs against $155 billion of US imports. Canada will use the money collected to ease the burden on Canadian businesses and consumers most affected by the US tariffs.
2. The Bank of Canada will likely cut interest rates further and faster than they would have otherwise if the Canadian economy slows down too much.
3. The Canadian dollar will go down making our exports more attractive even with the tariffs.
4. In addition to Canada, China and Mexico will retaliate with their own tariffs putting more pressure on the American consumer and employment.
5. The Canadian government has said they are considering a “pandemic like” fiscal response to provide further support to Canadian business.
6. Premiers across the country have announced sweeping buy Canada policies that are designed to encourage Canadians to buy local. The Ontario government has gone so far as to take $1 billion of American alcohol products off their shelves. Procurement policies across the country will most certainly steer buying decisions as much as possible to Canadian products and services.

 

It's this last point that I want to expand on. I didn’t understand the power of buying local until an organization called Excellence NB was established around 2017. It was founded and mostly funded by local businessman, Jon Manship, who sold his company Spielo a number of years ago to an American company. I went to the launch and part of the presentation was a study they commissioned and undertaken by an economist at the Universite de Moncton, Pierre-Marcel Desjardins. I’m attaching a copy of the study in case you want to read it. The purpose of the study was to measure what economic impact we would see with a 10% increase of buying of New Brunswick products and services. So for example, if you buy an American brand of toilet paper 10 times a year, one of those times you switch to Royale which is made right here in New Brunswick.

 

Please click this link to read the full article.

 

The results were amazing. It was estimated that in the short and medium term, the GDP of New Brunswick would grow by about $2 billion and almost 9000 jobs would be created. New Brunswick’s GDP is about $35 billion per year so an increase of $2 billion is nearly a 6% increase. That would be unheard of for New Brunswick. We have a labour force of about 400,000 people so 9000 jobs would reduce unemployment by over 2%. Again, this would be unheard of for New Brunswick. What if we did 20%? That would not be out of the question and the impact would be incredibly positive.

 

You have probably spoken to people you know and seen on social media the wave of buy Canada sentiment that is sweeping the country. Thirty six states have Canada as their number one customer for their exports. Six states have us as their second biggest customer. I truly believe Americans are going to be shocked by our response and it is unfathomable to me that American business will not be feeling a lot of pain because of our buying decisions in the coming weeks and months. I’ve read several economists’ predictions on how this will play out and none of them address this counter measure that we can easily implement. This is sad to say but their pain will be our gain and I do not believe that this phenomenon in being factored in enough when considering the effects on the economy.

 

I would strongly encourage you to visit Excellence NB | Excellence New Brunswick Association Inc.. It’s an incredible organization that has really given a boost to local business in New Brunswick.

 

In my line of work, I have to consider best and worst case scenarios. The worst case scenario is these tariffs are permanent. I don’t believe this will be the case. There would be massive job losses on both sides of the border and it simply won’t be tolerated long term. My sense is you will start to hear the words “waiver” and “carve out” a lot in the next few weeks and months. The best case scenario is the tariffs are cancelled before they are implemented. I don’t see that happening and my sense is we will end up somewhere in between. As always, I will be monitoring your portfolios very closely and making adjustments as I see fit. I’m expecting volatility in the markets and will take advantage if opportunities arise.

 

Feel free to reach out to me if you have any questions.