The Trouble with Tariffs

If we could focus on a forecast without tariffs, it would probably be pretty good; declining inflation and interest rates, with corporate earnings broadening beyond the “Magnificent Seven” tech names that drove half the S&P growth number for the last two years. However, the new U.S. administration is already making clear it is committed to tariffs as a key trade policy tool.

A recent article in The Economist warns that in the event of U.S. tariffs aimed at trading partners, “retaliation will exert a seductive pull, not least as a show of strength. It would, however, be an act of self-harm. Few countries are more insulated against trade shocks than America, with its large domestic market. Better to … deregulate. If Mr. Trump wants to tilt the playing-field, the best way to cope will be to become more competitive.”

Canada, along with Mexico and Europe, are developing counter-tariff strategies. A trade war is analogous to standing in the middle of a boxing ring and trading body punches until one party falls. If the author of The Economist piece is correct, we can’t win that fight. Our only edge is that the U.S. needs Canada’s energy and minerals for their own consumption and production.

A federal election is coming this year, sometime before October. The winner would do well to focus on deregulation, reducing the burden of our tax system, reducing government’s footprint, re-establishing fiscal restraints and reducing or eliminating trade barriers between provinces, where there are effectively tariffs in place as high as 21%! 

According to a recent panel of economists (Economic Club of Canada, January 9th) Canada has one of the highest sensitivities to interest rates globally. Getting past 2022 was no small feat and the central bank’s efforts worked. The spread between interest rates in Canada and the U.S. will drive down the CDN dollar versus its U.S. counterpart. While making U.S. travel and imports more expensive, it also makes Canadian goods more attractive. That, in turn, will lessen the impact of U.S. tariffs on Canadian goods for U.S. buyers – not likely the impact that the U.S. administration is looking for in rebalancing trade. 

W. Cameron Leith, CFP, CEA

Senior Financial Advisor