Tariffs and Trade War – What They Mean for Us

Threat of a “trade war” has made the headlines lately. It started with President Trump’s tariffs on China, aimed at pressuring that country to allow more American investment and discourage further abuses of intellectual property. Now it’s hit us. Steel and aluminum tariffs, from which Canada was initially exempt, are coming into effect on Canadian exports. That blow is expected to cost steel and aluminum industries a total of $3.2B USD a year, nearly 5 times as much as the $689M USD cost China is expecting.

Prime Minister Trudeau announced retaliation, with “dollar-for-dollar” trade-tariffs on a range of products.  Is this the beginning of a trade war? A tit-for-tat battle where the U.S. imposes continually more severe tariffs on Canada in response to Canada imposing tariffs on the U.S. It’s a vicious cycle, and there are plenty of gloomy prognostications that this is exactly what may unfold.

Such an escalation would likely hurt the financial markets, however Brian Belski, chief investment strategist at BMO Capital Markets, has said that he has not seen an impact of the current proposed tariffs on U.S. or Canadian stock markets. Additionally, the steel and aluminum tariffs are only expected to shave 0.33% off of Canada’s Gross Domestic Product (the value of all goods produced). Regardless, it’s important to understand the effect these high-level economic developments can have on everyday consumers and investors, so let’s break down what trade tariffs might eventually mean.

We’ll start with the obvious – Canadian steel and aluminum industries will take a hit should the tariffs remain in place. It is estimated that 6,000 jobs may be lost, most within Ontario and Quebec (the largest producers of steel and aluminum, respectively). While concentrated to the metal sector, the impact can be far-reaching.

For Canadian consumers, U.S.-made products with steel or aluminum components eventually become more expensive (canned foods/beverages, boats, cars) as a result of higher input costs. Any resulting unemployment in the Canadian metal sector also means lower discretionary income for Ontario and Quebec. This impacts the profitability of other companies operating near steel and aluminum hotspots, reminiscent of the way that non-energy companies operating out West suffered from low oil prices.

If sustained, tariffs could hurt the value of our loonie as well. As Canada’s exports to the U.S. fall (an inevitable result of their higher cost with the tariffs), demand for the Canadian dollar (used to buy the exports) will fall with it, lowering its value relative to the U.S. dollar.

But possibly the most damaging outcome of the tariffs is the uncertainty it sows into U.S.-Canadian relations. While free trade between the two countries was once taken for granted, a potential trade war brings a lot of uncertainty to the operations of Canadian firms selling to the United States. This could discourage new business investment in Canada. This is where a wider spread malaise could appear within our stock market.

Though we can’t know where this ends up, we do prepare for worsening trade-relations through portfolio diversification. Companies held in portfolios managed by WDS operate across a broad range of industries, reducing the effect of industry-specific tariffs.  Also, stock holdings with international operations further reduce exposure to the Canadian-centric issues.

It’s possible consumers will adjust their spending habits in response to the trade spat as well. Maclean’s recently released its “patriot’s guide to shopping during the Canada-U.S. trade war” (link down below), listing products you can buy to better support Canadian business activity, and more companies may begin marketing their domestic operations. While I’ve always preferred Heinz ketchup, I’m happy to try a bottle of French’s this week to do my part (it’s the thought that counts, right?).

 

Maclean’s link: https://www.macleans.ca/news/canada/a-patriots-guide-to-shopping-during-a-canada-u-s-trade-war/