Trump's tariff threat
In a post on his own Truth Social platform, incoming US President Donald Trump threatened to impose 25% tariffs on all imports from Canada and Mexico. He declared that this tariff will remain in effect until "such time as drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!"
Markets reacted moderately to the news, with the Canadian dollar weakening about a cent versus the US dollar, but it’s nothing more than market jitters at the moment.
As we’ve seen in the past, Trump likes to incite his supporter base with bold and brash statements. While the tariff threat is cause for concern, it’s also prudent to wait and see what actually materializes. This is likely how he will choose to form policy with Canada and Mexico—by making large overarching demands upfront, and then settling for a better deal on specific items.
Also, considering the tariff threat is tied to drugs and border control, the Canadian border is less of a concern. According to the CBC1, cases of people trying to enter the US from in-between northern checkpoints last year barely amounted to one percent of the total overall numbers.
This tariff would directly go against the United States-Mexico-Canada Agreement (USMCA)—which Trump negotiated during his prior term—so there is some precedence on reasonable dealmaking to fall back on.
A blanket tariff is likely to significantly impact a variety of sectors in both Canada and Mexico, such as the energy, auto, and agricultural industries. This will not leave American consumers unscathed, as it will affect downstream prices too. According to the Energy Information Administration (EIA), as of February 2024, 52% of petroleum imports into the US were from Canada and 11% from Mexico. That accounts for 4.42 million barrels per day imported, compared to consumption of 20.25 million barrels (as of 2023 annually) per day.
While petroleum products are the largest component of trade between Canada and the US, there is a significant amount of non-oil commodity and agricultural trade between the three countries. This ranges from automobiles and parts - the largest for Mexico and significant for Ontario - to food products and chemicals. There will no doubt be a negative impact on the Canadian and Mexican economies, but US consumers are likely to bear a significant amount of the costs through increased prices for goods and food prices.
The bottom line is that there has been some market reaction to the news, but nothing has changed materially. We don't know what will come of these tariff threats, when, and to what degree. It is prudent to expect more negotiations from a trade perspective between the three nations with the incoming administration. However, assuming what will come to fruition is nothing more than speculation. From an investment perspective, our view on equities and positioning are continuously reviewed, but we are unlikely to take action on this until we get more information as to what will be implemented.
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