U.S. President Donald Trump holds an executive order about tariffs increase, flanked by U.S. Commerce Secretary Howard Lutnick, in the Oval Office of the White House in Washington, D.C., on Feb. 13.Kevin Lamarque/Reuters
Bears shriek that Donald Trump’s Canadian and global tariffs will whack world commerce, stoke inflation and sink stocks. Many argue the sell-offs on the TSX and S&P 500 since the end of January signal a nastier, tariff-induced plunge ahead.
Uncertainty over the U.S. President’s on-again, off-again levies may keep jostling stocks in the short term. But it won’t last.
The theory behind today’s tariff doom: Americans worry about Canadian (and other countries’) exporters passing tariffs along to U.S. consumers, reigniting hot inflation – preventing the U.S. Federal Reserve from cutting rates while curtailing consumption and shrinking GDP. Eek!
Outside America, and especially in Canada amid Mr. Trump’s threats and actions, many fret about being unable to pass on tariffs and having to take a hit on profit margins and exports.
That is the theory. And, yes, all else being equal, tariffs are bad! They create frictions for commerce, pick winners and losers and often channel demand counterproductively. But the reality is nuanced.
Consider Mr. Trump’s first term. Fear of tariffs then hinged on similar arguments. But inflation didn’t spike. Growth didn’t tank. U.S. inflation was just 2.4 per cent in 2018 and 1.8 per cent in 2019. When global inflation spiked in 2021 and 2022, COVID-19 lockdown-induced supply chain disruptions and crazy global monetary supply explosion were the culprits – not tariffs.
Growth? U.S. GDP rose 2.5 per cent in 2017 – before tariffs. After? Three per cent and 2.6 per cent in 2018 and 2019, respectively. Normal wiggles. Tariffs neither hammered demand nor spiked prices.
Global GDP echoed this, growing 3.5 per cent in 2017, 3.3 per cent in 2018 and 2.7 per cent in 2019. Even China – Mr. Trump’s prime first-term tariff target – grew 6.9 per cent in 2017, 6.8 per cent in 2018 and 5.9 per cent in 2019, simply extending years-long slowdown trends. The overall impact of tariffs wasn’t huge, economically.
Many say Mr. Trump’s second-term tariffs will far exceed his first term’s. Maybe. So far, Mr. Trump imposed 20-per-cent tariffs on all Chinese goods, 25-per-cent tariffs on all steel and aluminum and, as you know, 25-per-cent tariffs on many Canadian and Mexican goods. (Some Canadian imports, including energy, face a 10-per-cent rate.)
In Mr. Trump’s first term, many Chinese companies skirted tariffs by routing shipments through Vietnam and other countries. Perhaps Canadian companies wouldn’t. But does anyone really think a 10-per-cent tax will dry up pipelines? As I wrote in February, energy is a huge slice of Canada’s exports to the United States. Elsewhere, would entire supply chains, such as the auto sector, unwind? No. Exporters likely cut some costs, change suppliers, raise some prices and eat some of the rest. This blend reduces the effects.
Other tariffs – from a 250-per-cent Canadian dairy tax to “reciprocal” duties – are either threatened or being studied. Might they materialize? Sure. But all newly announced U.S. tariffs, as of now, on all countries, if fully collected, would total only 0.75 per cent of U.S. GDP at the very most, without any “skirting.”
And for Canada? New tariffs could total as much as $66-billion. That may sound big, but put it in perspective: As I write, those tariffs, if fully collected (which they won’t be), total about 2.2 per cent of Canada’s 2024 GDP. Negative, but not catastrophic. Tariffs on China (0.5 per cent of its GDP) and Mexico (3.4 per cent) are similar. Those are maximum estimates.
Also, as my 2025 forecast detailed, tariffs hit goods – not services. Globally, services dominate, accounting for 70 and 62 per cent of Canadian and global GDP, respectively.
Tariffs’ supposed inflationary effects? Nonsense. That requires money supply spiking in parallel. It isn’t. U.S. M4 growth – the broadest money supply gauge – is back to normal, pre-pandemic rates. (Measures of Canadian money supply show a similar pattern.) Tariffs may increase costs for essential items. But consumers easily substitute more discretionary products. That’s not great for those affected, but it’s not an economywide disaster, either.
Yet people seem utterly tariffied! The OECD just slashed global growth projections, largely citing Mr. Trump’s edicts.
But does the President even want tariffs to last? As I said in previous columns, Mr. Trump usually uses tariff threats as bargaining chips – not actual goals. Threatening tariffs brought countries to the bargaining table during his first term, leading to new trade deals.
We have already seen him waffle on Canadian tariffs once. He floats possible new China deals, too. Tariff threats may fully or partly evaporate if deals emerge.
What of a universal tariff, like Mr. Trump touted while campaigning? That would require Congress to act – which can’t happen. Republicans’ edge is too slim. If Mr. Trump attempts to move without legislation, legal challenges would hit America’s Supreme Court almost instantaneously.
Tariff talk sounds tariffying. It can rattle stocks short-term, as recent volatility illustrates. But widespread tariff terror likely proves much more benign than feared – a powerful relief set to propel stocks higher as 2025 progresses.
Ken Fisher is the founder, executive chair and co-chief investment officer of Fisher Investments.