Martin Pelletier: While Trump’s threatened 25% tariff on Canadian imports isn’t a given outcome, we need to get our house in order.
Donald Trump isn’t in office yet and we’re already getting glimpses of what’s to come with threats of 25 per cent tariffs being slammed on imports from Canada and Mexico. At first glance, it’s right out of his Art of the Deal playbook: Entering into negotiations with a huge threat is exactly what he did during his first term.
Being a risk manager, I wouldn’t say this is a given outcome, as presidents in their second term can be a lot more aggressive with policy implementation given that they have nothing to lose. That said, it’s hard not to believe that Trump isn’t aware of the cost should the full extent of the tariffs come to light.
Overall, the analysis I’ve seen by Bob Elliott, former investing executive at Bridgewater Associates LP, shows about 80 per cent of the tariff cost could ultimately get passed along to the U.S. consumer who is the lifeblood of their economy. Roughly 43 per cent of U.S. imported goods could be impacted and, according to BMO research and highlighted by former BNN host Frances Horodelski, it could push up U.S. PCE (personal consumption expenditures) inflation by one per cent next year.
For example, tariffs on the 4.3 million barrels per day of Canadian oil imports would greatly affect U.S. oil refiners who are specifically built to handle our quality of crude, therefore resulting in significantly higher gasoline prices in the U.S., something Trump has promised he wouldn’t let happen.
Unfortunately, the fact of the matter is we need the U.S. more than they need us. For example, U.S. exports to Canada represent 17 per cent of its total exports, compared with Canadian exports to the U.S. representing a whopping 77 per cent of ours. The Canadian Chamber of Commerce’s October report takes this a step further by showing the divergence on a state versus provincial basis.
“In Montana, trade with Canada accounts for 16 per cent of the state economy, in Michigan it’s 14 per cent and in Illinois it’s 10 per cent. Even as far away as Texas, trade with Canada still accounts for 4 per cent of the state economy.” Meanwhile, in Canada, the report reveals just how much provincial economies depend on trade with the United States, with New Brunswick at 62 per cent, Manitoba and Alberta at 42 per cent, Ontario at 41 per cent, and Quebec at 23 per cent.”
At the same time, the Canadian economy is in a much more fragile condition than the powerhouse United States that seems to be chugging along just fine. This is evident via the gap in GDP per capita between our two countries widening by 106 per cent since Trudeau was elected as Prime Minister in 2015. In fact, this has now reached its widest point in nearly a century.
For some insight on the potential impact, according to economist Trevor Tombe, should the full tariffs be implemented, the Canadian economy would take a 2.6 per cent real GDP hit (annually) or about $2,000 per person, sending the country into a full fledged recession.
Meanwhile, we have a federal government that is persistent in targeting small businesses via tax changes, keeps increasing carbon taxes and introduced a capital gains tax at a time when Canada is in desperate need for capital. The budget deficit also keeps getting larger, along with the number of government workers, as, under Trudeau, the civil service has grown twice as fast as Canada’s population.
Fortunately, energy is a huge hammer we hold in trade negotiations. But the Trudeau government is now trying to phase it out by introducing an emissions cap that will require an estimated production cut of one million barrels per day by 2030 and 2.1 million barrels per day by 2035, as cited by S&P Global Inc. It would also potentially kill 150,000 jobs in the country. Let that sink in.
There is a lesson we can learn from all of this. The bottom line is having a strong and well diversified economy puts us in a more powerful negotiating position, but we keep going down a different path.
We clearly need to get our own house in order and our Canadian dollar flirting with 69 cents is telling you this. We need to increase our productivity levels, implement policies to attract foreign capital and encourage domestic capital sources, such as wealthy Canadians, to deploy funds into the economy. We need to provide opportunities for young people to succeed. We need more entrepreneurs and risk takers. We need to not cap our resources but rather start building infrastructure to get them to global markets outside of the United States.
There is a long list of things that need to get done, but are we finally brave enough to impose the change required to do so? I’m sure that’s a deal most Canadians are finally ready to make.
Editor’s note: An earlier version of this story stated U.S. exports to Canada represent 21 per cent of its GDP compared with Canadian exports to the U.S. representing 77 per cent of our GDP. The correct statistic is U.S. exports to Canada represent about 17 per cent of its total exports, compared with Canadian exports to the U.S. representing 77 per cent of our total.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.
