Terrifying Tariff's ?

by: Jeffery A. Keill, CFP, CIM, FMA,FCSI, Portfolio Manager and Senior Wealth Advisor

With the stroke of a Sharpie- turmoil.  President Trump recently signed the Executive Order to initiate tariffs on several countries.  Then within days both Canada and Mexico successfully  negotiated a delay in their implementation.   This has caused some panic and far reaching reactions globally. Though the opportunity is often there to do so, we seldom feel compelled to address economic short-term events that have little to do with long term investment success. After all, we are concerned solely on the success of our clients and a major part of the success comes from understanding the difference between investment behavior and investor behavior. It is the foundation of our constant soapbox preaching that successful investment outcomes happen when we let logic triumph over emotion. This is very hard to do as one aspect is so frequently at odds with the other.  In light of all this chaos and while we have a slight reprieve for a month or so, lets  review the likely impact of the tariffs on Canadians and then some concluding thoughts should they actually be used. 

Impacts:

The U.S. tariff on Canadian goods as it stands now, will have a notable impact on trade between the two countries, as well as on various industries in both nations. While the specifics can vary based on the type and target of the  tariff imposed, here are some ways tariffs could impact  both economies.

    1. Increased Costs for Canadian Exporters

U.S. tariffs, particularly on products like aluminum, steel, and softwood lumber, have raised the costs for Canadian exporters in the past. This has been a constant problem going back to the first Trump administration. This has made Canadian goods more expensive for American buyers, potentially reducing demand. For example, a tariff on steel and aluminum imposed by the U.S. in 2018 affected a range of industries from construction to manufacturing in both countries. There is a trickle-down affect when the cost of these base commodities are artificially inflated by taxes.

     2. Impact on the Canadian and U.S. Economy

Canada is one of the U.S’s largest trading partners, and these newest tariffs have strained trade relations to say the least. These latest tariffs which are very broadly applied will cost Canada billions of dollars in trade revenue and lead to retaliatory tariff’s and actions on several U.S. goods. Canada’s response to these tariffs can somewhat soften the blow, but overall impact will surely be negative for certain industries both side s of the border.

   3. Retaliatory Tariffs

In response to the U.S. broad based 25% tariff, Canada proposed retaliatory tariffs on various U.S. products and banning the sale of certain other products. This will make the U.S. based products more expensive for Canadians or simply no longer available. 

      4. Effects on Supply Chains

Many  industries in both countries are very tightly interlinked through cross-border supply chains. For example, U.S. manufactures often rely on Canadian’s raw materials like timber, oil, auto parts, which are subject to tariffs. When tariffs are imposed, it disrupts these supply chains, making production more expensive and inefficient for businesses on both sides of the border.

       5. Impact on Industries like Automobiles

The automotive sector has been another area of concern. Many U.S. automakers rely on parts from Canada, and when tariffs in the past were placed on Canadian aluminum and steel, the cost of making cars went up. The North American Free Trade Agreement (NAFTA) had already been designed to facilitate trade in this sector, but tariff’s will now complicate things even more.

       6. Potential for Trade Diversion

The imposition of tariffs may also push Canada to diversify its’s trading partners. For instance, Canada has increasingly looked to other markets like Europe and Asia to  mitigate the effects of U.S. tariffs. The Canadian-European Union Comprehensive Economic Trade Agreement (USMCA) (replacing NAFTA) are examples of attempts to expand trade relationships outside the U.S. Canada and the world will likely look to foster other partnerships to help offset the trade interruption with the USA.

       7. Political and Diplomatic Strains

The imposition of tariffs has not just been an economic issue in the past but as we move into more damaging tariff’s, it will create tremendous political strain that for more than a generation was an amicable and mutually prosperous affair. The relationship between Canada and the U.S. has been somewhat strained due to these trade policies, especially since Canada has been a reliable trading partner and ally for the U.S. for many years.

        8. USMCA Agreement

The USMCA, which replaced NAFTA, was negotiated in part to resolve many of these trade frictions. The agreement included provisions designed to reduce tariff’s and encourage fairer trade, but the full impact of these changes on tariff policies was still unfolding as the newest levies were introduced. In some cases, the USMCA has helped mitigate the harm caused by previous tariffs but that now is affectively set aside. The agreement which was to be re-looked at next year will now likely need to be revised sooner if we attempt to set aside this latest trade battle.

How does this affect our investment portfolio?

Lets start with these main points and build it out from there:

• We lived in a tariff world before NAFTA and we prospered.

• This is NOT a global trade war among multiple nations

• Diversification remains key to long term success

• Investment outcomes is based not on Investment Returns but more on Investor Behavior.

• The tariffs have yet to be levied and there is still a possibility and hope this can be avoided.  

Prior to NAFTA we lived in a world of tariff’s and excise tax. Many people seem to forget this fact and there is a whole generation that never experienced it. I argue that we also did quite well in that world and saw our nation and our companies still provide great returns for its citizens and investors. It is not the fact of the tariff’s but the speed and severity in which Trump has unleashed them. Over time economies will adjust to reflect the new trade realities.

Many investors will fear their portfolio will be damaged by the breakdown of North American trade alliances. While it is true that there will be some disruptive forces at play during the coming months as we work through the changes, our investors would kindly remember that our portfolio is not overweighted in Canadian investments or in one geographic area or industry. All our portfolios are globally diversified and although volatility can not be avoided, we believe that the balance we maintain will mitigate the downside. Further to this, I know that our investment specialists are actively looking to not only reduce the risk but also take advantage of opportunities that will surly present themselves.

In respect to the holdings we have, we hold securities of quality value. This can not be said for some of the mutual funds and EFT’s that have dominated the landscape in recent years who have predicated their positions on a world that seems to have changed dramatically since November.

The key takeaway we believe is this- the outcome we will realize as investors ultimately is going to be based not on the investment markets themselves but on the very decisions we make.

Conclusion:

While the U.S.- Canada tariff situation is dynamic and continues to evolve even after the agreed delay to impose on each other, the general impact should they be imposed will be an increase in the cost of trade between the two countries, disruption to supply chains, and possibly dynamic shifts in trade patterns. Industries in both nations are heavily reliant on cross-border trade, like manufacturing, agriculture, and automotive, will be some of the hardest hit industries. However, the eventual shift back towards a renewed agreement like USMCA offers a potential way to ease some of these burdens moving forward if the two sides can finally come to the table.

Moving forward it is imperative that our clients and all investors keep in check their emotions during short term shocks and remain focused on the longer term. Like I have stated so often in the past, successful investment outcomes happen when we let logic triumph over emotions.

The coming months will likely be one of those challenging times and I fear not everyone will have the constitution to realize the opportunity before them.

Disclaimer and Notice to Reader:  This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter.   Professional tax and legal advice should be obtained for the readers own personal situation.  For more information on this topic or how it applies to your family, please contact our Wealth Advisory team. 

Last edit Feb 11, 2025