We are all concerned and confused. I mean, what the heck is going on?
There’s an uncertainty index that tracks uncertainty in the market. We’re actually higher now in uncertainty than we were during Covid and the financial crisis.
OK, I just wanted to show you that.
Big Picture Analogy
I have kids in daycare and they are always getting sick… there are rolling colds that go through our house and we’re always looking for the good drugs for my wife and me and kids Tylenol for our children.
So the analogy with the tariffs is that we can think about it like a parent would with our family’s immune systems as the economy and the tariffs as an illness, and drugs as economic cures/interventions. Some people have stronger immune systems and some people have weaker immune systems. Some people take drugs to mask their illnesses and some do not. And, sometimes the drugs work and sometimes they don’t. Same thing with the economy…
Unfortunately, Canada went into 2025 with a very weak immune system (in contrast with the United States economy). Think of the United States immune system like Arnold Schwartzenager pumping iron and drinking a green juice, whereas Canada can be Michael Cera in “This is The End;” not the epitome of health/wealth.
Canada doesn’t have a lot of diversity of economic activity or investment and a lot of Canadians are already feeling like the economy is a little slow. Cyclically, we just dealt with very high interest rates, and productivity per person just isn’t there.
So, our starting place is a place of weakness, or a weak immune system, particularly in comparison to the US.
And now we add a tariff shock. It’s like catching a virus out of nowhere.
So how bad is the economy going to get? Even the economists have trouble putting a number on it.
But, The Damage Has Been Done!
Just the threat of a tariff on Canadian goods or the Canadian economy already creates an impact. First, it’s just sheer uncertainty. If people don’t know if they are going to lose their jobs, and if businesses don’t know if they are going to contract or grow, people/businesses just freeze. Spending goes down, investment doesn’t happen, new employees don’t get hired, and everything stagnates.
It’s not just Canadian companies that are not investing. American and global companies now look at Canada as an uncertain place to do business because goods that are manufactured here may, in the future, be tariffed/taxed and it would be just smarter to build a factory or invest in the US than in Canada.
This all happens before the virus even comes, before the tariffs are even enacted.
The Solution/Cure.
Drug makers to combat the virus are the Bank of Canada and the federal government and the drugs include but are not limited to policies, spending/handouts, and interest rates.
Recently the Bank of Canada cut its prime rate from 3.0% to 2.75%. This “drug” is supposed to spur investment and economic growth. Going forward, economists expect more cuts coming, specifically because the economy is slow and slowing (even before the tariff threat). Most economists expect another two rate cuts by this summer, and potentially more if the tariffs hurt us further.
With government policies (another drug), on the other hand, some people think the government should step in and provide covid-like spending/stimulation. This will likely be challenging to do because the tariff shock is not like a covid shock at all; covid was a pause in the market with a future unpausing, while the tariffs are a “transition” to our economy. And, if we just hand out checks to everyone, we risk greater inflation which would create further problems.
So, the government will likely have to do targeted support to specific industries/sectors hurt most by the tariffs. Alberta, Ontario and Quebec seem to be the provinces with sectors who have the most to lose with tariffs.
Additionally, we have our own interprovincial barriers to trade, which the IMF has likened to a 21% tariff. Imagine that – we already tariff our own goods from province to province; luckily there’s now going to be some movement on this (hopefully).
What’s Happening with the Canadian Dollar?
Lastly, one question that many people have is: what is the Canadian dollar going to do? So far, we’ve had weakness in the Canadian dollar and the question is whether we’ll see more weakness ahead.
As an aside, a weak Canadian dollar would make our goods more palatable and less expensive to American buyers, outweighing some of the demand-side tariff harm.
Now, if the Bank of Canada is cutting so much, shouldn’t that weaken the Canadian dollar even further? Well, what’s interesting with the currency market is that it already deals with market expectations on where interest rates are going to go over the next 2-3 years, and the currency market has already incorporated a lot of Canadian weakness and the trade war into its level. The good news is that we’re not really expecting a decrease in the Canadian dollar, but we’re not expecting the Canadian dollar to strengthen either.
So, if the Canadian dollar doesn’t decrease much further, there may be a lot of pain coming for American purchasers of Canadian goods. Further down the line, fewer goods will be purchased from Canada. Long story short, if our currency weakens with the tariffs, the less of an effect the tariffs will have on our economy.
What’s Driving these Tariffs?
It must be fentanyl, right?!
Economists have identified Trump’s tariffs as coming straight out of Mercantilism.
Mercantilism: Mercantilism is a nationalist economic policy that is designed to maximize the exports and minimize the imports of an economy. In other words, Mercantilism seeks to maximize the accumulation of resources within the country and use those resources for one-sided trade; trade deficits are bad, imports are bad, and exports are good.
Trump: “We’re subsidizing Mexico and we’re subsidizing Canada and we’re subsidizing many countries all over the world.”
The problem is that this isn’t how trade has worked. We’ve had very integrated supply chains… It will cost the United States billions of dollars to set up their own manufacturing plants, aluminum smelters, and other capital intensive projects that they want to move from Canada to the US.
Mercantilism was last relevant in the 1800s… The issue with Mercantilism is that it’s got a zero-sum mentality: there’s a finite amount of goods that each country can make and trading does not provide for higher output. The problem is that we know, for the last 200+ years, that trade does in fact improve overall output. So, does Mr. Trump really want all of these tariffs or is he getting at something else?!
Does he even know what he’s getting at?!
Thanks for reading!
Warm regards,
Eitan