Over the last few weeks Cliff, Mark, and Mario have been speaking with various experts and industry insiders on the upcoming tariffs and the potential outlook for both the U.S. and Canadian economies.
For Background: On November 25, 2024, President-elect Trump announced that Canada would face 25% tariffs starting on Day One of his presidency. His primary justifications included issues such as NATO commitments, fentanyl trafficking/border security, and the trade balance. He stated that if Canada made progress on these issues, the tariffs could be avoided. President Trump later extended the deadline to February 1st; by which date Canada had not made sufficient progress towards resolving theses issues. The U.S. has now implemented the promised tariffs.
The Current Situation: The U.S. has imposed 25% tariffs on a majority of Canadian goods. The U.S. administration has made it clear that if Canada retaliates, these tariffs could increase. Canada has responded by introducing its own set of tariffs, with some provinces like British Columbia targeting Republican states specifically. This has prompted calls from the Republican base for Trump to further escalate tariffs on Canadian goods.
Not Our First Trade War: During Donald Trump's first term, a trade war with Canada was initiated when he expanded 25% tariffs on steel and 10% on aluminum to include Canada, Europe, and Mexico in June 2018. Canada retaliated with tariffs starting July 1, 2018. The conflict was resolved diplomatically, and the U.S. lifted these tariffs against Canada and Mexico in May 2019.
Market Impact during the First Trade War: From June 2018 to May 2019, the S&P 500 had a total return of approximately 6.41%, including dividends. While the S&P/TSX Composite Index (TSX) in Canada saw a decline with a total return of about -2.35%.
Differences in 2025: Now, in 2025 the scope of U.S. tariffs is broader. The U.S. unemployment rate is lower compared to pre-COVID-19 times, and the economy is relatively strong and growing, with the Federal Reserve concerned about excessive growth. Conversely, Canada is experiencing a growing unemployment rate, with the warnings of a worsening economic outlook.
Political Context:
Canadian Side: During the first trade war, the governing Liberals had a stronger support base, but now are facing record low approval ratings. Prime Minister Trudeau has resigned, leading to the prorogation of Parliament to avoid triggering a general election, which limits the government's response capabilities. Potential liberal leaders are currently vying for leadership, complicating Canada's ability to respond effectively.
U.S. Side: In his second term, Trump faces less immediate political pressure to resolve the conflict quickly, especially enjoying his highest public approval ratings between his two terms, allowing for a potentially longer and more intense trade war.
Breaking Down GDP Trade Between Canada and U.S.:
U.S. Perspective: Canada's trade with the U.S. represents approximately 1.5% to 2% of U.S. GDP.
Canadian Perspective: Canada's exports to the U.S. constitute between 17.45% to 21% of its GDP, with key sectors like energy, automotive, and manufacturing heavily reliant on the U.S. market.
Industry Commentary (AGF): On January 20th, Mario Mota of The Steele Group held a call with Greg Valliere, Chief U.S. Policy Strategist in Washington, and Jonathan Lo, Vice President of Growth Equities from AGF Investments in Toronto. The medium to long-term outlook for U.S. markets appeared positive, with Jonathan predicting a positive year-end for the S&P 500 in 2025. Despite the positive market outlook, Greg Valliere predicted the tariffs would indeed come into effect, citing Canada's NATO commitments as both the core issue and potential solution.
Replay Link: Please find a replay of the January 20th call here
Industry Commentary (Fidelity): Our team also recently met with Fidelity, the largest private asset manager from the U.S., who expressed concerns about Canada's ability to settle tariff issues swiftly. Should the trade war become prolonged, they are predicting a potential 6% drop in Canadian GDP and 1-3 million job losses, leading to a deep recession. In contrast, in Fidelity’s view the U.S. market outlook remains positive.
What we hear from our Manufacturing Clients': Various manufacturing clients of The Steele Group are preparing for decreased activity and potential layoffs, confirming industry experts' warnings. Canada is in its weakest position to resist U.S. demands, and prolonged conflict will exacerbate local impacts.
Conclusion & view from The Steele Group: This is a fast-changing environment where both governments might be stirring emotional responses. While Canadians will feel the local economic impacts, the global and U.S. markets are expected to continue growing in 2025. This discrepancy underscores the importance of distinguishing between local headlines and broader market trends to avoid making poor financial decisions based on short-term local news.
With our clients’ portfolios already structured to protect and grow wealth, even as Canada faces significant economic headwinds, we do not recommend making any changes at this time. If you have any questions, please do not hesitate to reach out to Cliff, Mario, Mark, or our TSG team.