In this video, Chief Economist Eric Lascelles provides a deep dive into the recent tariff announcements, scenarios that could unfold from here, and the associated implications for the economy.
View transcript
00:00:06:02 - 00:00:28:06
Hello and welcome to our video on tariffs. 2025 has begun certainly with a lot of talk about tariffs and some threats made to various countries, including a 10% tariff on China that has just been applied. The plan for this video is to share with you some thoughts as to very briefly what a tariff is and just the mechanics behind how the economy is affected by those tariffs.
00:00:28:10 - 00:00:48:04
But to very quickly work our way into just what President Trump in the U.S.is thinking in the context of tariffs, and what the current actions have been and some scenarios in terms of the economic implications and some Canada specific thoughts and then some market thoughts at the end. Let's jump right in and we'll start with the basics.
00:00:48:04 - 00:01:07:22
And I won't belabor this too long, as I suspect almost everybody has a pretty good sense for tariffs at this juncture. But just to make it crystal clear, a tariff is a tax. It's a tax imposed by a government on imported products. And so that tax is levied as the product crosses a border into the country that is taxing it.
00:01:07:22 - 00:01:25:00
It's the importer who pays the tax that might be the company who also happens to have made the product in a foreign country. It might be the company planning on selling the product in the domestic country. It might be someone else altogether, but that's where the tariff is paid.
00:01:25:00 - 00:01:47:13
And usually, tariffs aren't a flat rate. Usually, they are a percent of the value of the product being imported. And just in terms of the first order consequences. So, there are plenty of swirling second order consequences. But just the immediate effects would be, of course, the government does get to earn some revenue. You can acknowledge that possibly they'll be bleeding revenue elsewhere if the economy ends up weaker, but they do get to collect some revenue.
00:01:47:14 - 00:02:05:23
The tariff is again paid by the importer, but the cost is usually then spread to some extent up and down the supply chain. And it's unclear. Depends on circumstances, just who ends up paying the bulk of it. I would say historically, and in 2017 to 2020, it was the consumer who ultimately ended up paying most of the tariff.
00:02:05:23 - 00:02:27:13
But in theory, it could be the exchange rate possibly absorbing part of the blow. It could be the foreign producer, it could be the importer, it could be the wholesaler or the retailer, or right through to the consumer, or some combination thereof. Some combination thereof is probably the right answer, but skewed somewhat toward, the consumer. International trade obviously is discouraged when there is this, friction, this impediment to trade.
00:02:27:15 - 00:02:50:18
Domestic producers in general are helped. They're able to charge more money, they're experiencing less foreign competition. Domestic consumers are hurt because, of course, they're paying more for products. Or perhaps they get fewer products or less selection. And foreign producers, of course, are hurt because their products are relatively disadvantaged. So that's what a tariff is. And of course, we did see some tariffs applied during the first Trump term.
00:02:50:20 - 00:03:15:12
We're seeing threats, there in this go around with, again, China having just experienced a tariff quite recently. I should mention before too long, I'm recording this the morning of February 4th. This has been a rapidly moving sequence of events, and so I'll acknowledge the situation could even be different in a matter of hours. I'll just say that as it stands right now, we think we have a little bit of clarity, at least in terms of Canada and Mexico having had their tariffs delayed about a month.
00:03:15:14 - 00:03:35:02
I'm also hoping to share some thoughts that that are just general principles that hold true regardless of the exact contour of events over the coming days and weeks. In terms of the economic damage from a tariff, it was tempting to think that this is simple back of the envelope math and all we need to say is, hey, a country imports $100 billion of things and it applies a 10% tariff, and so that's $10 billion of damage.
00:03:35:02 - 00:03:54:05
It's not actually how it works. You might argue that's $10 billion of government revenue, though I should emphasize only if demand was completely inelastic and people kept buying the same things, which is probably unrealistic. But government revenue isn't economic damage, that's just money being transferred from the pockets of one party to the pockets of the government.
00:03:54:05 - 00:04:11:06
The government could well do very good things with it and pump that back into the economy. Consumers could pivot and buy other things instead, reducing the damage, and the list goes on. So, the point being, we can't actually just do simple math to figure out the tariff damage. We have to figure out, quite a range of things.
00:04:11:06 - 00:04:34:01
And so, you can see in front of you, well, there are positives when a country imposes a tariff. It does get more tax revenue, at least from those tariffs. And so that's a positive. We see more domestic production in principle. Right. There's less, importing happening and so more scope for domestic production, though of course, in a country where the unemployment rate is already low, there's not that much scope to actually increase production.
00:04:34:01 - 00:04:55:12
But that's another story. But there are a lot of bad things that ultimately usually outweigh the good. And so product prices become more expensive. So the average person is poorer, countries currency usually goes up. And so that is a competitive disadvantage. There's less specialization which means that usually productivity is somewhat hurt because companies are spreading themselves too thin.
00:04:55:14 - 00:05:14:21
There's less selection in the context of, as much as companies are spreading themselves thin, they're probably still not in a position to completely replace all of that foreign production and the variety of products that were available. And as a result, consumer choice is reduced. That's an economic damage. And of course, just there are supply chain headaches as supply chains are forced, to reorient.
00:05:14:21 - 00:05:43:20
And so usually that's a net negative. If the country facing the tariff responds, it's always a net negative. In fact, everybody loses in that scenario. Of course, the country facing the tariff experiences a weaker currency, which is a competitive advantage. Suffers fewer exports, has its own supply chain headaches. And so it's always a negative there. But to the extent we're seeing countries respond to Trump tariff with tariffs of their own, you can argue everybody actually experiences to some extent both columns of damages.
00:05:43:22 - 00:06:03:19
Let's move forward from there and really just get into specifically what U.S. President Trump thinks about when he thinks about tariffs. And so I would say, really there are two ways of viewing the purpose of tariffs here. One is just as a threat. So as a threat of tariffs as a tool to secure various U.S objectives that are beyond its borders, and I'll get to that in a moment.
00:06:03:21 - 00:06:18:08
The other one is of course just tariffs for their own sake. And there is a bit of that too. So, the threat of tariffs, again the point is to make people nervous and to extract concessions. I would say that is succeeding. People are very nervous indeed.
00:06:18:10 - 00:06:43:01
I would say as well, the other key message is to listen very carefully to what President Trump is demanding. And so, he's talked in the North American context about border security quite a bit. And so that is what he is looking for. And I guess no surprise just to give away the lead here. But we did see Canada and Mexico managed to at least delay their tariffs by a month by promising more border security to throw additional, essentially workers and border guards at the problem.
00:06:43:03 - 00:07:04:15
He'd like to reduce illegal immigration and illegal drugs. He wants a more favorable trade balance. That's harder to achieve than you might think, but that's certainly part of the goal. He wants to reduce foreign protectionism. In some cases, foreign countries have their own protectionism that disadvantages U.S. businesses. Wants to reduce the U.S. military burden as well, and maybe even sell more military goods abroad.
00:07:04:15 - 00:07:24:15
And so essentially, again, tariffs are as a threat as opposed to tariffs in and of themselves. And I wouldn't say it's a purely hopeful thought because of course it does suggest concessions from other countries. But it does suggest that the purpose of tariffs isn't purely to have big tariffs stick around forever. So that's quite promising. However, I do think there is a bit of tariffs for their own sake all the same.
00:07:24:15 - 00:07:44:12
And so a Trump does view tariffs as a revenue generating tool. I think you can debate whether your government would still be net ahead after you factored in the economic damage. But that might be beside the point, because of course, what President Trump needs is just from an accounting perspective, more money in a government coffer that can be then used via the reconciliation process to enable, tax cuts.
00:07:44:12 - 00:08:03:12
And the tax cuts are what he really wants to deliver. And saying that he's generated tariff revenue is a means of achieving that. I think it also like to protect American businesses, improve national security, and perhaps even punish just like countries. That seems to be part of the equation as well. So it's a mix of those two things as I'll speak to in a moment.
00:08:03:12 - 00:08:32:18
We think the conclusion is we'll hear talk of big tariffs. We might see smaller tariffs actually implemented. In terms of the perspective on trade, though, I would say that the Trump and the white House current attitude is just that deficits are bad, and perhaps even the fault of other countries. And that's probably not quite economically sound just in the sense that, you know, every party is willing in a foreign trade transaction, if one party is paying money via currency, the other party is receiving a good no one is being compelled to do this.
00:08:32:18 - 00:08:48:08
This is all voluntary. Both parties actually think they're doing something that is to their benefit and likely is to their benefit. Note as well, just from a different standpoint, that if the U.S. did want to get rid of its trade deficit, as a country, it would have to save more money. Those two things are one and the same.
00:08:48:08 - 00:09:06:00
If you are a net importer, you are also a net borrower from the rest of the world. And as a result, the U.S. wants to stop being a net importer. It does need to save more. And so, the purpose, the point being, certainly it would require behavioral changes on the U.S. side as well.
00:09:06:00 - 00:09:25:21
And then as an economist, I guess I'd be remiss if I didn't just acknowledge that in theory, the purpose of trade and the benefit that accrues from trade, is really comparative advantage and the idea that you could have one country that's better and cheaper at every single thing that can be made on the planet, and another country that's worse at all those things. Those countries can still benefit a lot from trade.
00:09:25:23 - 00:09:40:08
You know, the purpose is we want to let that really efficient country do the things that it's especially good at or particularly better at, versus the things that it's not as much better at. And we let the other countries do the things that it's not as much bad that there are gains to be made from that for all parties.
00:09:40:08 - 00:09:57:10
And so that really is the purpose of international trade. It's not to create winners and losers. In terms of the scope for action from President Trump's tariff threats. Well, I mean, they are considerable in our view. And so President Trump did have an opportunity to learn from his first term how government works, how to do these sorts of things.
00:09:57:12 - 00:10:21:20
He has more ideologically aligned partners in Congress, in the white House, in the court system, as well. So the scope for action in theory is very much there. I think the tempering factor is that President Trump likely doesn't want to do things that hurt the U.S. economy too much. And so famously, he begins negotiations with a maximal threat and then normalizes those to less extreme positions later.
00:10:22:00 - 00:10:38:18
We know he cares about the stock market. The stock market doesn't love tariffs, particularly big tariffs. We know he has a lot of investment leaders and business leaders surrounding him, who also are probably not too keen on the economy or markets being hurt. We know he's supported by small businesses who implicitly would like the economy to be strong.
00:10:38:20 - 00:11:00:08
And we know in particular he doesn't want high inflation and tariffs in general also increase, inflation. They increase the cost of things. And a lot of that does accrue to the consumer. And so, the takeaway to me is we're likely to hear and we are hearing the threat of big tariffs, a lot of 25% tariff talk, in particular in a Canada Mexico context, some big tariffs could be applied.
00:11:00:08 - 00:11:24:06
I don't think we can rule out that a month from now we will get big tariffs temporarily or some variation on that. But ultimately when push comes to shove, when we look back maybe a year from now, it's more likely to be smaller and potentially targeted tariffs that are nevertheless implemented. And it allows, I think, some balancing of not hurting the economy too much, but still generating some government revenue and still extracting some concessions from other countries.
00:11:24:08 - 00:11:41:17
So let's talk about what we've actually heard. So it's now been just over two weeks since President Trump took office in his second term. And, let's take a look. And of course, certainly worrying. And part of the purpose is to make us all worry in the short run. But I would emphasize that the developments so far have not been exclusively negative whatsoever.
00:11:41:17 - 00:12:04:01
In fact, I've taken considerable heart from some of the developments. One major comment is just that we've seen significant hesitation on the part of the White House in terms of implementing tariffs. Tariffs were only mentioned briefly in the inaugural address. Despite promises to the contrary, tariffs were not imposed on day one. Tariffs were then delayed from February 1st to February 4th.
00:12:04:03 - 00:12:22:19
Now Canadian and Mexican tariffs have been delayed until early March. There was a study commissioned on the first day to reach conclusions by April 1st. It's possible we get further delay. So I interpret that hesitation just as if the U.S. administration thought the tariffs were a pure good and something that boosted the U.S. economy. They do it on day one.
00:12:22:20 - 00:12:43:22
They wouldn't be hesitating like this. So I think that we can say that this is significantly a negotiating strategy designed to extract concessions. And realistically, we're unlikely to see those big tariffs applied in a permanent sense. In terms of size scale, what we did get those tariffs on China, 10% tariff. We did say on China that there won't necessarily be large tariffs later.
00:12:43:23 - 00:13:03:21
We also saw that TikTok ban temporarily reverse so it’s antagonism toward China is significantly less than it might have been. Trump has also said that he's not ready for that 10% universal tariff on all countries yet, which had been threatened at one point. Treasury Secretary Scott Bessent has talked about a 2.5% universal tariff that would then escalate over time.
00:13:03:21 - 00:13:29:04
And certainly none of that's welcome. But I would say, again, if you thought tariffs were a good thing in and of themselves, you do the 20% tariff immediately. A whole notion of escalation is to apply pressure to other parties. And so that suggests the U.S. doesn't want actually to end up with a permanent 20% tariff from a negotiating strategy perspective, are really just making the point that indeed tariffs are at least significantly a negotiating strategy as opposed to a means unto themselves.
00:13:29:06 - 00:13:49:13
Look back now, just over a week ago to negotiations with Colombia. And so Trump threatened to 25% tariff on Colombia unless the country accepted more, flights with rejected migrants. And Colombia initially said no, hence the tariff threat. Colombia then turned around and said, yes, those tariffs are gone. So again, the purpose wasn't the tariffs. The purpose was to extract concessions.
00:13:49:15 - 00:14:11:04
In the case of Mexico and Canada, both countries have now achieved a one month delay, at least in those 25% tariffs. And that's essentially by agreeing to more border controls, Mexico to 10,000 more troops at the border, Canada to greater border controls and spending more money and creating a fentanyl czar, as well. So, suggest again that the tariffs aren't a means onto themselves.
00:14:11:06 - 00:14:33:14
And so, in conclusion is that tariffs are many things to Trump. But as much a negotiating tactic as a revenue tool. Okay, this is probably the big slide in the sense that this is the scenarios we've been thinking about some of the economic and inflation damage that might result from those scenarios. I know it's very tempting to immediately glom onto that North America focused tariff scenario with the big green arrow.
00:14:33:17 - 00:14:52:17
That is indeed what President Trump has been talking a lot about. The 25% Canada tariff, 25% Mexico, 10% China. I'm going to get to that in a moment. I will just say, I do still believe there are a variety of ways this could go. That's probably a little bit less of a wild claim that it might have been a day ago when it looked like Canada would be experiencing tariffs.
00:14:52:22 - 00:15:14:04
Today, as I record this, but nevertheless, let me talk through these various scenarios. So there is still a scenario where there are not significant tariffs applied, at least not for any significant period of time. And so of course, if that happens, then there's really no enduring economic effect or inflation effect. I would say the experience from the 2017 to 2020 term was not that different than this.
00:15:14:04 - 00:15:33:12
China did end up with higher tariffs. Other countries for a year had higher tariffs on steel and aluminum. But ultimately we didn't see the effective U.S. tariff rate ex China change all that much. So don't completely rule out that is a scenario just as something to mention. Beyond that, we have four remaining scenarios. Two are quite adverse, two are somewhat more modestly negative.
00:15:33:12 - 00:15:50:22
So, there's no real winning here. It's about losing less the two big negative scenarios, right. Either the original tariff plan, which Trump had campaigned on, which is a 60% tariff on China, 10% on the rest of the world, doesn't seem to be too centrally focused on right now, other than occasional mentions of a 10% tariff on the rest of the world.
00:15:50:22 - 00:16:12:01
That would be bad for economies including the U.S. Wouldn't be full on recessionary, and those GDP effects are the cumulative damage over two years. So not a one-year hit. But nevertheless, it would be significantly negative. And it would be somewhat inflationary. The worst-case scenario, I'm afraid to say, is tentatively the scenario Trump has been most focused on recently, those North American focused tariffs.
00:16:12:01 - 00:16:29:06
And so if we were to get those and if they weren't subsequently listed, and I have my doubts about that, by the way, but if they weren't subsequently lifted, there would be very real economic damage. And this is a scenario in which the U.S. economy is hurt pretty darn badly, in which Canada and Mexico suffer a full on recession.
00:16:29:06 - 00:16:46:03
We see their economies about four percentage points weaker than they would otherwise be. That's the scenario in which inflation ends up quite a lot higher. Or I should say the price level does because it's a one-time shock. And so, you wouldn't expect it to remain higher, but nevertheless prices leap higher and then remain higher. That's the worst-case scenario.
00:16:46:05 - 00:17:07:03
It is certainly plausible. That's the path that we're on. I would just say based on recent evidence of delaying tariffs, based on the way other tariffs have been lifted as other countries make concessions, I actually think more likely are the fourth or fifth scenarios, the more modestly negative scenarios here. And so that fourth scenario, the substantial but temporary tariffs, that's really the North American tariffs scenario.
00:17:07:03 - 00:17:24:19
But it's not permanent. He got the big tariffs. They get withdrawn within a few months or at worst a few quarters. There is some real damage. It's not full-on recession damage. And so that would be consistent with viewing this as a negotiating strategy. Do note that you could see some pretty significant short term temporary damage immediately.
00:17:24:19 - 00:17:40:21
You might even see, the likes of the Canadian economy shrinking for a period of months. But then as soon as those tariffs were lifted, a little bit like the way things work with a natural disaster, you'd get a big bounce back and you'd end up still with cumulative damage on the year. But it wouldn't be, nearly to the same extent.
00:17:40:21 - 00:17:59:01
So we think that's a real scenario. And then maybe the most likely one, in our view, is the final scenario, which is partial tariffs. That's the one we've been thinking most about ever since the Trump campaign began. And this would be smaller tariffs, targeted tariffs. Maybe it's steel and aluminum. Maybe it's European auto sector, this sort of thing.
00:17:59:03 - 00:18:16:21
Consequential to be sure, but ultimately a manageable low. That's the description of both of the more modestly negative scenarios, which is nobody particularly wants them. They do do economic damage. They do increase prices. It's not a recession, though. It's something that we part of the economic story, but it's not something that dominates the economic story.
00:18:16:21 - 00:18:35:10
And we think that's probably most likely. And again, I think that probably balances the desire for, for tariff revenue with the desire not to hurt the U.S. economy too much. So, I know it's not very much, discussed right now, but we wouldn't be surprised at all if one of those two final scenarios ultimately happened. That sort of economic damage is what we have currently in our base case forecast.
00:18:35:13 - 00:18:52:21
If it ends up being worse, we will certainly need to revise down growth and revise up inflation with all of the consequences that come with that. So, this really just follows up on, what we just said, which is, well, how come Canada and Mexico get hurt worse than other countries? Even if you're talking about a 10% blanket global tariff.
00:18:53:00 - 00:19:11:10
Well, of course, it all comes down to who trades the most with the U.S. and what fraction of their economies are essentially consumed by the U.S. And so, these numbers precisely reflect that. So, genuinely, any 26.6% of what Mexico creates as an economy is sold to the U.S., 19.7% of what Canada makes is sold to the U.S.
00:19:11:15 - 00:19:32:00
Vietnam surprisingly sneaks in. There is a very large number as well. You see some other Asian countries which are pretty intensive trade partners. Interestingly, the likes of Europe and Japan and China are much less exposed and so certainly we need to be thinking about those countries in the context of tariffs. But just as an example, with China having experienced a 10% tariff, recently.
00:19:32:01 - 00:19:48:03
Well, you know, only 2.4% of their GDP goes to U.S. demand. And so, this is not a killer blow to them. They sell, well, first of all, they're a very large domestic economy. They sell roughly half of what they export to the rest of Asia. More than 20% of what they sell, to the rest of the world, to Europe.
00:19:48:03 - 00:20:07:09
And, you know, the U.S. share is actually fairly limited. Let's, continue on here and just pivot over to Canada. And so when we talk about, Canada, let's just start with some basic thoughts. So here are, Canada's goods exports to the U.S. by industry. I focus on goods just because the service sector doesn't seem to be in focus for tariffs, at least right now.
00:20:07:09 - 00:20:23:10
Although there were a few, rumblings to that effect in the last 24 hours that could yet change that. And so the biggest Canadian export to the U.S. is mining and oil and gas. It's maybe not a surprise that as tariff threats were made to Canada, the 25% tariff does not apply to oil and gas.
00:20:23:10 - 00:20:43:03
That is a 10% threat that's been made. Transportation equipment is number two. So when we think of reasons as to why, perhaps big tariffs might not stick on Canada would be this integrated North American, auto sector. And the significant damage that would result in that's the second biggest source of exports, from Canada to the U.S.
00:20:43:08 - 00:21:02:11
If you were to see those two sectors, limited in their damage. And again, the first sector is already, tentatively set to see less extreme damage, if the transportation equipment sector was thrown in as well, you're talking more than 40% of what Canada exports to the U.S., perhaps being excluded from the heaviest tariffs, just in terms of some general facts in terms of this trade relationship.
00:21:02:11 - 00:21:26:06
Canada is the second largest exporter to the U.S. after Mexico, ahead of China. China was number one for a while. But the tariffs from 4 to 8 years ago, ultimately have slipped it into third place. Canada is the number one importer of U.S. products. That's a big, important relationship to the U.S. The overall U.S. trade deficit with Canada is just $45 billion, not the $200 billion that we've heard cited.
00:21:26:08 - 00:21:45:10
And indeed, there are some tempering factors even to that number. Canada is a net importer of U.S. manufactured goods. And so to the extent that's been a focus, from a Trump perspective, that would suggest that there isn't an imbalance of relevance. Canada is a net importer of U.S. services. So, if you throw on services, the trade imbalance looks smaller.
00:21:45:12 - 00:22:02:08
And if you were to exclude Canadian energy imports, that trade surplus flips to a deficit. So, you could say, why would you exclude that? But the notion being that the U.S. likes getting Canadian energy without that one particular thing, actually the balance runs the other way. What is Canada thinking about in this tariff context?
00:22:02:08 - 00:22:25:18
Well, obviously a 25% tariff has been, proposed. We'd be surprised if a sustained 25% tariff was levied. It could stick for a period of time, but we'd be surprised if it endured. You know, Trump again famously begins negotiations with over-the-top demands and usually ratchets those back down. This threat of tariffs has been tied explicitly in Canada's case to border security, maybe to military spending as well.
00:22:25:20 - 00:22:46:01
Sustain reciprocated tariffs were really damaging to the U.S. economy as well, which President Trump doesn't want. It would be hard for Trump to lower energy costs if 4.3 million barrels a day, if Canadian oil is subject to a big tariff, even if it's a 10%, not a 25% tariff. And like I said, it would be hard for the U.S. auto sector to function, given the integrated North American supply chain.
00:22:46:01 - 00:23:06:20
And ultimately, these are American businesses as much as they have large Canadian presences, and so that would be a problem as well. I think it's worth thinking back on the experience of the 2018 to 2020 tariff and tariff threats. And so, again, tariff reuse then, as well as a threat to renegotiate NAFTA. There were threats of a 25% tariff on the auto sector was never levied.
00:23:06:22 - 00:23:24:23
Mexico was threatened with a 5% blanket tariff that would rise by five percentage points a month to 25%. That was over border security that was never levied. So we're getting a bit of a pattern here. Steel and aluminum tariffs were levied. They were implemented for about a year from March 2018 to May 2019. And so that wasn't great.
00:23:24:23 - 00:23:47:09
But that, again, is consistent with our view this time, which is smaller, more targeted tariffs. Canada responded with tariffs of its own. Mexico did the same. They were very much focused on, discretionary spending. And the dispute was ultimately resolved, with the signing of the USMCA trade deal in the spring of 2019, Trump did put a tariff on Canadian aluminum for about a month in 2020, but that was very short lived.
00:23:47:11 - 00:24:09:06
To me, the takeaway from all of that is tariffs used as a threat, not always delivered. Scope for negotiations. After the negotiations, room for the tariffs to either go away or to significantly, decline. So that's very much informing our thinking right now. In terms of the Canadian tariff response, Canada did very much propose to respond with tariffs of its own.
00:24:09:08 - 00:24:27:05
And so, a 25% tariff on initially $30 billion Canadian of U.S. goods that would escalate three weeks later to $155 billion. Collectively, that's about half of what Canada imports from the U.S.. You can see it's actually not quite tit for tat. So, the U.S. would do 25% tariffs on most of what Canada sells to the U.S.
00:24:27:07 - 00:24:45:09
Canada would do it on about half of what the U.S. sells, to Canada. Cleverly, at least focused sectors though in terms of focusing on politically sensitive demand elastic sectors where the damage would be less to Canadians, where even the price of that could be shifted more to the U.S. producer side as opposed to the Canadian producer side.
00:24:45:09 - 00:25:05:00
And so, the plan was and again, this is all delayed because the tariffs have been delayed on the U.S. side. But alcohol, fruit and vegetables, clothing and shoes, appliances, furniture, sports equipment, that was the first round. And then of course if you're then going to apply to something like half of U.S. products, being exported, well, you know, vehicles, steel, aluminum, meats and dairy has to get much broader by definition.
00:25:05:03 - 00:25:32:03
There is also some scope to challenge U.S tariffs and courts to the extent that it might constitute an overreach. And it is simultaneously though the expectation is there would then be negotiations with the U.S., conceivably concessions with the U.S. over border security. And Canada has now dedicated more than a billion additional dollars to that. But you could imagine additional expectations, defense spending Canada, well shy of that NATO target of 2% of GDP, let alone the Trump target, which I think is probably unrealistic, 5% of GDP.
00:25:32:09 - 00:25:53:09
Arctic defense likely to be in discussion that Canadian digital services tax, which is levied essentially on tech giants in the U.S., not very popular in the U.S. that was put in place last year, that could be under pressure. You know, Canadian protectionism like supply management industries could again, you would think, be under pressure. Softwood lumber always seems to, to be in the discussion as well.
00:25:53:11 - 00:26:10:08
Maybe there's scope for Canada to commit to buy more U.S. goods. I don't exactly know who or how. It's not exactly conventional, economic orthodoxies. But I can say China did promise that last time in its trade deal, although it never ultimately fully delivered, though there was a pandemic. So it's hard to say how that would have played out.
00:26:10:12 - 00:26:38:16
Of course, reopening the USMCA trade deal is without question, whether it's in 2026 or immediately is maybe a bit less clear. But you would think central discussions would be around increasing further wage minimums to limit the Mexican advantage over the U.S. and Canada, further limiting Chinese transshipments through Mexico, and perhaps even sacrificing Mexico if it came to that, you know, Canada certainly would take note that Trump's complaints with the border are really more Mexican centric.
00:26:38:16 - 00:26:58:20
And many of these labor cost concerns are also very much Mexican centric. I would assume the three countries remain together, but it's not impossible that there is a series of bilateral trade deals that are struck, instead, and then, of course, pushing for the opposite, which is Fortress Am-Can, the idea that if Trump wants Western Hemisphere resources, that's a discussion about integrating more, not integrating less.
00:26:58:20 - 00:27:18:01
And so maybe there are opportunities to reduce barriers to trade in the flow of money and people as opposed to having more. Really, the question here is it all sounds neat and tidy, but the question is how many concessions Canada is willing to make. Whether that's enough for Trump. And what happens if Trump then comes back later and keeps returning and demanding more and threatening tariffs.
00:27:18:03 - 00:27:39:19
And it makes it much less clear that it makes sense to make concessions, and it makes it much less clear that you can actually avoid those tariffs. And we think a deal can be struck. But there is some uncertainty there. And then just a flag here. There was then the backup plan, which I don't think is going to be implemented unless it absolutely needs to be, but which would be export taxes and import restrictions and presumably deepening ties, if possible, with Asia and Europe and other.
00:27:39:19 - 00:27:59:02
Making the U.S. a little bit jealous, perhaps. And then, of course, there is this endless list of unconventional options which are pretty unlikely to be implemented, but you could restrict, airspace of U.S., planes or Canadian port restrictions for U.S. trans shipments or Alaska land transit, or selling U.S. dollar reserves, or canceling military orders. The list goes on.
00:27:59:02 - 00:28:24:17
I think unlikely at this point to be delivered, but that possibility does exist. A couple other quick Canadian thoughts. One would be, I've heard concern, can Canada respond given that the government has been prorogued, there is essentially no parliament. The answer is yes. The cabinet has significant legal power. The legislation is already on the books to allow for retaliatory tariffs, even for limiting exports or imposing export taxes if desired, in a pinch.
00:28:24:17 - 00:28:40:03
And it certainly would need to be a real pinch. You could declare a state of emergency and act without legislation as well. The bigger question to me is the ability to deliver fiscal stimulus. If the big tariffs did hit Canada, presumably you would want to help the Canadian economy. That is harder to do without a parliament that’s sitting.
00:28:40:03 - 00:29:03:16
You could declare a state of emergency, which is a pretty big step. You could reconvene Parliament, which would be a better step. And the NDP have suggested they might support the liberals in that context, and perhaps they could get something through at what price you might ask? And I would just say hopefully lessons have been learned from the pandemic in terms of, fiscal stimulus and how it's targeted, vetting applicants, stimulus scale, duration as well.
00:29:03:18 - 00:29:31:15
Bank of Canada response. I mean, inflation goes up with tariffs, output goes down. Which one dominates? The output concerns dominate. Bank of Canada would cut rates more, not less. And so you'd expect some additional, rate cutting on that front, though, to the extent that tariffs could come on briefly or we thought they were coming on yesterday today and they're not coming on today, you would think that the Bank of Canada would need to actually see the tariffs are in place for a period of time before cutting rates, because they could be on for a day.
00:29:31:17 - 00:29:45:17
And then you've cut rates and you put yourself in a bad position and you don't want to have to undo that rate cut, the next day. So likely the rate cuts would not be quite as inter meeting or quite as rapid as you might initially think. Okay. And let me finish with this. And so just some market thoughts as well.
00:29:45:17 - 00:30:03:15
And so again, I'm the economist, I’m probably not the final authority on the market side, but just a few general thoughts, which is of course, the initial response to the proposed Trump tariffs has been a negative one. Lower equities, lower risk assets, lower bond yields I would say. The U.S. yields are not lower, but other countries have seen lower bond yields and risk aversion.
00:30:03:15 - 00:30:24:08
There are some concerns about growth, some expectation of rate cuts there as well. From a currency standpoint, the U.S. dollar has gone up to the extent it's been the main belligerent, other currencies have been weaker. So that's the initial response. That's classic. That makes sense. From a more granular perspective, you would say tariffs in general are worse for goods companies than service companies.
00:30:24:08 - 00:30:47:21
Tariffs don't seem to be applied to the service companies. In general, you'd think smaller companies do better than bigger companies just because they're less trade oriented, though that depends. And smaller companies might be importing products and are hurt by that. But in general, you might say smaller companies do better than bigger ones with tariffs. And then companies, of course, by definition with big domestic client bases do well, those with big foreign client bases at least we have the tariffs been applied on that foreign relationship do somewhat worse.
00:30:47:23 - 00:31:06:08
And then in terms of next steps or what happens next from market perspective obviously depends on whether tariffs are applied or not and whether they stick or not. As a base case, our view and I think this is pretty consistent with markets. Is it tariffs are more likely to be removed than escalated from here or maybe not applied than escalated.
00:31:06:08 - 00:31:30:12
And so I think that's why there's been a relatively tame market response relative to what might have happened. I think there is scope for a modest rebound if Trump keeps delaying tariffs or if he reaches explicit agreements with nations that take those tariffs off the table. However, there is scope, again, just from the perspective for a significant tumble if tariffs are applied, if they stick, and if other countries are hit as well.
00:31:30:12 - 00:31:49:09
And so just in terms of the asymmetries there, the scope for a big drop if you get tariffs, the scope for a mild rebound, if you don't that asymmetry does argue, in our view, for incrementally cautious tilts and investment portfolios and being a little bit less aggressive. And indeed, you may be aware that we have increased our fixed income holdings slightly just reflecting this as a period of uncertainty.
00:31:49:09 - 00:32:05:08
And there are some scenarios in which things go worse. Not our base case scenario. The base case is actually for a mild tariff to be applied. But just from a risk reward perspective, we think a bit of caution is appropriate, particularly at a time when bond yields are fairly attractive.
00:32:05:10 - 00:32:11:16
And with that I'll just say thank you very much for your time. I hope you found this interesting, and we'll do our best to stay on top of tariffs going forward.