Do you think Donald Trump will implement his threatened 25-per-cent tariffs on imports from Canada and Mexico? If so, how should one handle that from an investing point of view? Is Canada still a good place to invest?
I’m not losing any sleep over potential tariffs on Canadian exports to the U.S. Nor am I making any changes to my portfolio based on what the unpredictable Mr. Trump might or might not do.
It seems I’m not alone.
Even as the Canadian dollar has slipped about 1.7 U.S. cents since Mr. Trump’s presidential election victory, the stock market hasn’t blinked. From Nov. 5 through Thursday, the S&P/TSX Composite Index gained more than 4 per cent and has been hitting record highs in recent weeks. That is “hardly the response one would expect if serious economic damage loomed large,” Bank of Montreal chief economist Douglas Porter and senior economist Robert Kavcic said in a recent note.
“On balance, it appears that the market simply does not take the tariff threat seriously, or that it does not represent a major step up from previously expected protectionist leanings by the incoming president.”
There are still a lot of unknowns. For example, some sectors – such as auto manufacturing and energy production – could potentially be exempted from U.S. tariffs. It’s also possible that the threatened 25-per-cent rate could be dialled back to 10 per cent and eventually withdrawn, the BMO economists said.
How Canada and Mexico respond introduces another layer of uncertainty.
Prime Minister Justin Trudeau said this week that Canada will respond to any new tariffs imposed by the Trump administration. Ontario Premier Doug Ford struck a more combative tone, threatening to retaliate by cutting electricity exports to the states of New York, Michigan and Minnesota. An Ontario government official said the province would also consider curtailing imports of U.S. alcoholic beverages and restricting exports of Canadian critical minerals used in electric-vehicle batteries.
“It’s a last resort,” Mr. Ford said. “We’re sending a message to the U.S.: You come and attack Ontario, you attack livelihoods of people of Ontario and Canadians, we’re going to use every tool in our toolbox to defend Ontarians and Canadians. … Let’s hope it never comes to that.”
Assuming Mr. Trump makes good on his 25-per-cent tariff threat, the Canadian economy would certainly feel some pain. Economic growth would likely slow, business confidence and investment would fall, and unemployment would rise, the BMO economists said.
However, the Bank of Canada – which this week cut its policy rate by half a percentage point to 3.25 per cent – would likely attempt to soften the blow by slashing interest rates more aggressively. The federal government would also likely add more fiscal stimulus. Such moves would take a toll on the Canadian dollar, which could conceivably tumble another 5 per cent or 10 per cent, they said.
But even if the U.S. does slap tariffs on Canadian goods, it’s not clear that the measures would remain in place for long.
“If the past is any indication, any tariffs implemented would be removed or reduced as countries negotiate and/or amend existing trade deals,” Toronto-Dominion Bank economists said in a report. “But that wouldn’t completely mitigate the economic drag, particularly given the high propensity for proportional retaliatory tariffs during that interim period.”
Mr. Trump is wielding the tariff threat, in part, as leverage to persuade Canada and Mexico to curb the flow of illicit drugs and migrants crossing into the U.S. But some observers are taking Mr. Trump’s bluster with a chunk of salt.
“We continue to believe President Trump should not be taken literally,” Ian de Verteuil, an analyst with CIBC Capital Markets, said in a report to clients. “First and foremost, the tariff bark will likely be worse than the trade bite.”
While certain manufacturing sectors, such as recreational vehicles and aircraft, could be targeted, across-the-board tariffs on Canadian goods are unlikely, he said.
Mr. Trump must also weigh the fact that tariffs could come back to bite the U.S. economy. Not only would import tariffs raise prices for U.S. consumers, but any retaliatory tariffs slapped on U.S. goods entering Canada could hurt U.S. exporters.
“We continue to expect trade disruptions over Trump’s second administration, but we expect saner minds to prevail – if only because of self-interest,” Mr. de Verteuil said.
As an example, he said tariffs on the roughly 3.6 million barrels of crude oil that Canada exports to the U.S. every day would quickly drive up the price of gasoline at the pumps, which isn’t going to win any political points for Mr. Trump. Similarly, tariffs on Canadian-made auto parts “would harm well-established supply chains [and U.S. companies] and would likely boost the selling prices for cars for Americans,” he said.
A lower Canadian dollar, meanwhile, could actually benefit investors in Canadian companies – such as pipeline operators – that generate a portion of their revenue in U.S. dollars. That’s because, as the loonie falls, each U.S. dollar is worth more when converted into Canadian dollars for the purposes of reporting Canadian companies’ earnings and paying dividends.
Bottom line: If your portfolio is well-diversified and suits your risk tolerance, there’s no reason to start buying and selling stocks because of a threat that may or may not materialize. Holding good companies, or exchange-traded funds, through good times and bad is a proven strategy. Remember that this, too, shall pass.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.