Post-inauguration update
President Trump has now been installed for a second term, and he has certainly hit the ground running. Whereas he also commenced his first term with big visions, the scope for action is seemingly greater this time. His similarly large plans are now paired with greater experience and more ideologically aligned partners in Congress, within the White House, and in the courts.
Still, the President is not a monarch: there are legal, political and practical constraints that limit what he can accomplish. Furthermore, as per his book “The Art of the Deal”, Trump has long begun negotiations with maximal demands that help to normalize less extreme but still Trump-favourable outcomes later in the negotiating process. This means that the first proposal is rarely the final landing point. We should not presume the entirety of his more extreme policy proposals will be implemented.
Indeed, we continue to believe that when it comes to Trump’s more growth-negative policy ideas like tariffs, curtailing immigration and cutting government spending, a more moderate set of policies is likely to prevail. Developments since Trump’s January 20 inauguration are mixed.
On immigration: We fully budget for a substantial decline in both legal and illegal immigration, and a palpable increase in deportations. However, the bulk of America’s 15 million or so undocumented residents are unlikely to be deported despite campaign rhetoric to that effect. Actions taken in the past week have been substantial, but don’t contradict that view. They include an effort to end birthright citizenship (since temporarily blocked by the courts), the declaration of a national border emergency and an effort to step up mass deportations.
Economic growth is set to suffer from less population growth but not from the exodus of nearly 5% of the country’s population.
But when push comes to shove, the deportation efforts spanning several prominent cities netted only 538 people in the first week. Granted, that’s just the first week. But the U.S. needs to deport an astonishing 10,000 people per day over Trump’s four-year term to remove the entirety of the country’s undocumented residents, and that presumes no further illegal immigration.
More likely is that the pace of deportations picks up from the approximately 1,000 per day that has prevailed under recent presidents to something like 2,000 per day. Consistent with this narrower interpretation, Trump has talked about “deporting criminals” rather than focusing on the entirety of the undocumented population. In turn, economic growth is set to suffer from less population growth but not from the exodus of nearly 5% of the country’s population.
So far, austerity actions have been fairly small – a government hiring freeze and only US$145 million in savings via the cancellation of diversity, equity and inclusion contracts.
On spending cuts: There simply isn’t $2 trillion per year of cuts to be found unless entitlements like Social Security are pared – an unlikely proposition. So far, austerity actions have been fairly small – a government hiring freeze and only US$145 million in savings via the cancellation of diversity, equity and inclusion contracts. Big bang ideas like eliminating the Department of Education haven’t been delivered yet. Cutting the country’s green subsidies would be significant – potentially to the tune of several hundred billion dollars of withdrawn support – but Trump has simultaneously talked about hundreds of billions in additional money for AI and technology, and a desire to revitalize the military.
On tariffs: Big threats continue to be made, but not yet delivered. More on that in the next section.
We continue to hear about tax cut plans, and indeed highlight the potential that the proposed 15% corporate tax rate could apply more broadly than frequently envisioned.
On pro-growth actions: Meanwhile, on the pro-growth side of the ledger, we continue to hear about tax cut plans, and indeed highlight the potential that the proposed 15% corporate tax rate could apply more broadly than frequently envisioned. The U.S. already announced its withdrawal from the global minimum corporate tax accord.
On deregulation: Deregulation news remains light, aside from a clear commitment to increase U.S. oil drilling. We continue to believe deregulation will be an important growth driver, especially in the banking and energy sectors.
Finally, animal spirits remain strong: business confidence in particular has soared since the election, with little evidence of backtracking since.
The tailwinds from tax cuts, deregulation and animal spirits still seem capable of outmuscling the headwinds from tariffs, reduced population growth and spending cuts.
As a result, our base-case U.S. forecast remains for incrementally more rather than less short-term GDP growth once the net effect of Trump policies is tallied. This is to say, the tailwinds from tax cuts, deregulation and animal spirits still seem capable of outmuscling the headwinds from tariffs, reduced population growth and spending cuts. There is of course considerable uncertainty to the forecast.
Providing some reassurance of a constructive outcome, Trump still famously cares about the stock market. As a business leader, he also presumably cares about the economy. His White House is filled with successful corporate executives with a similar mindset. Small businesses appear to be counting on him as well. As such, it would be surprising if significant damage were inflicted on the U.S. economy.
Among other Trump commitments that don’t precisely fit into the growth framework above, there was a promise to lower inflation. Aside from increasing oil production, it wasn’t clear how this could be achieved given the potential for more economic growth and given that tariffs tend to be inflationary. Indeed, we assume incrementally more U.S. inflation as a result of his policies.
Trump also reiterated earlier expansionist comments about the Panama Canal, Greenland and Canada. We discuss those ideas in a later section.
All about tariffs
Of the many White House-driven policy ideas presently circulating, the threat of tariffs has particularly captured the imagination of investors and economic actors alike.
Although the threat of large tariffs hangs over the heads of a number of countries – mostly ominously, the proposed 25% tariff on Canada and Mexico – the first week could have been worse from a tariff perspective. President Trump’s inaugural address trod fairly lightly on the subject. Critically, he did not impose any tariffs on his first day in office, despite many other day-one actions.
Instead, he commissioned a study on trade practices to be concluded by April 1. This doesn’t necessarily buy targeted countries two months as he also spoke of potentially levying tariffs on February 1. But the point is that there is some hesitation, consistent with the idea that the threat of tariffs is meant to be used as leverage to secure other U.S. demands, not solely as objectives for their own sake. However, his talk of funding tax cuts with tariffs does highlight the probability of some tariffs.
President Trump also declared that he wouldn’t necessarily apply large tariffs against China, mentioning instead a mere 10% tariff. That’s a far cry from the 60% tariff threatened on the campaign trail. His decision to reverse the brand-new TikTok ban similarly points to his seemingly diminished antagonism toward the country. Trump also said that he was not ready for a 10% universal tariff on all countries yet. European tariffs were mentioned, but with no specifics on magnitude or timing.
Tariff theory
How do tariffs affect economic activity and prices? Calculating the economic damage from a tariff isn’t as simple as multiplying the size of a tariff times the affected imported products. That might capture the first-blush increase in government revenue, but only presuming completely inelastic demand, which is unlikely, and also that government revenue isn’t compromised elsewhere due to a weaker economy. And government revenue is very different than economic damage: after all, the government might use the extra revenue to cut taxes elsewhere. For that matter consumers put off by an expensive product might substitute their purchases for something else, rendering them no less productive and no poorer.
Instead, the full economic damage needs to be considered in the context of a small number of positive effects and a large number of negative effects (see next graphic). Yes, the country imposing a tariff might collect more tax revenue and manage more domestic production of the affected products. But the negatives add up quickly. Tariffs can lead to higher product prices – which reduces what people can afford – a more expensive currency, less specialization, less selection and short-term supply chain headaches.
Calculating all of this requires something more than a calculator and a scrap of paper. Any estimate unavoidably leaves considerable room for error. We discuss our own model-driven estimates shortly.
Economic damage from tariffs comes via a range of subtle channels
Tariffs are net inflationary, but sorting out what fraction of the tariff cost gets imposed onto the consumer versus other points in the supply chain is also tricky (see next graphic). Suffice it to say, much comes down to the relative elasticity of demand and supply at each point in the supply chain. Foreign suppliers with particularly differentiated products or with a high elasticity of supply can best push the cost of the tariff onto others. Those that produce commodities or that have a low elasticity of supply are most exposed to paying the tariff out of their own pocket.
Conversely, at the opposite end of the supply chain, consumers purchasing discretionary goods or products for which there is a domestically available substitute are in the best position to avoid paying directly for the tariff. Those purchasing necessities or differentiated products are less capable of dodging the price impact.
In the middle of this supply chain, the currency and wholesalers/retailers also sometimes absorb some of the blow.
In practice, the 2018—2019 tariff experience was that very little of the tariff was directly borne by foreign suppliers, while the great bulk accrued to the U.S. consumer who paid a higher price. Incidentally, if this were to hold for 2025, one could describe U.S. tariffs as being somewhat equivalent to a sales tax. The bulk of the revenue would be indirectly coming out of consumers’ pockets. This is fascinating in that to the extent the government is talking about using the tariff as a source of funding for tax cuts, one of the more theoretically efficient ways of raising government funds is via a sales tax. Of course, the American public would never tolerate an actual federal sales tax, so perhaps this constitutes a clever back-door version, albeit with ample economic costs elsewhere.
The price effect of a tariff can show up in a variety of places
Tariff damage
What kind of tariffs are likely to actually emerge in the coming weeks or months? No one quite knows, which is why it is probably most useful to think about it via multiple competing scenarios. We flag five main scenarios (see next graphic). Two of these scenarios are quite negative, two are only modestly negative, and one has a neutral effect on the economy. All assume countries reciprocate proportionately against U.S. tariffs.
Quite a range of possible tariff impacts – “partial tariffs” still most likely
The first two scenarios are different versions of a worst-case scenario, involving Trump doing exactly what he has said he will do: enact his maximal tariff threats. Fortunately, we believe each of these has only a 10% chance of happening.
Original tariff plan: 10% chance
The first such scenario is the original tariff plan from the campaign. It calls for a 60% tariff on China and a 10% tariff on the rest of the world. We estimate that, within a few years, the U.S. economy would be about 1.2% smaller than otherwise (meaning the economy would still likely grow, but by less), China’s hit would be -1.4%, Canada would lose 1.9%, Mexico would lose 1.5% and the global economic hit would be -1.0%. All of this is to say that the economic damage would be significant, but probably not quite recessionary.
North America-focused tariffs: 10% chance
The second scenario is what Trump has more recently focused on: 25% tariffs on Canada and Mexico, and a 10% tariff on China. This would naturally be very bad for Canada and Mexico, which would lose 4.5% and 4.0% of economic output, respectively. The U.S. would also fare poorly as it iced out its biggest trading partners, losing 1.5% of output. The global economic hit, however, is slightly smaller in this scenario given its regional focus: -0.8%.
The next two scenarios are much less negative, and also considerably more likely in our view.
Substantial but temporary tariffs: 25% chance
This scenario imagines that one or the other of the two prior scenarios is enacted, but only temporarily. Big tariffs are applied to exert maximum pressure, but a deal is struck after a period of several months to a few quarters, allowing the big tariffs to be removed and the economy to grow again. There is still obviously some upfront damage that occurs, but the peak-to-trough hit is considerably smaller – just a third as large as the average of the prior two scenarios. The U.S. economy grows by 0.4 percentage points less, China loses 0.3%, Canada loses 1.0%, Mexico loses 0.9% and the global economy loses 0.3%.
Partial tariffs: 45% chance
The most likely scenario, though still with less than a 50% chance, is partial tariffs. This has been our base-case scenario from the beginning. It sees additional tariffs applied to a number of major trading partners, but at a moderate scale and targeted on products such as steel, aluminum and a handful of other sectors. Broadly, countries lose 0.1% to 0.3% of their economic output, with those particularly tied to the U.S. such as Canada at the upper end of the spectrum.
No tariffs: 10% chance
Finally, as per the recent Colombian experience, it is technically possible that the vast majority of countries manage to negotiate a mutually agreeable solution to Trump’s demands, such that no additional tariffs are levied. This doesn’t seem especially likely given Trump’s talk of using tariffs to fund tax cuts, and given his distress at the sizeable trade imbalances that exist with some trading partners. Note that these imbalances cannot be fixed overnight (and incidentally aren’t necessarily an economic problem or even to the disadvantage of the U.S.).
With such a range of possible outcomes, it is impossible to speak with much confidence as to what happens. But some insight is still possible. Just doing some simple arithmetic, the more modest tariff scenarios have a collective 70% chance of happening, which is pretty likely. Those are outcomes that are compatible with solid economic growth in the U.S. and moderate growth in the affected countries.
Conversely, strong tariffs of the sort that seriously interfere with economic growth have just a 20% likelihood, and ones that induce an outright recession – for Canada and Mexico, at least – have just a 10% chance. These probabilities are of course subject to change.
Our modelling struggles to reach much consensus on the inflation effect. Suffice it to say, we believe tariffs to be inflation-positive for the U.S., if with a magnitude no larger than the absolute value of the hit to U.S. GDP for each scenario. It would probably also be positive for Canada given the country’s close trade ties with the U.S., though the large hit to growth does temper the theoretical effect. The inflation impulse is more ambiguous for other markets, where the trade connection to the U.S. is often more tenuous, and where negative tariff growth effects might dominate positive tariff price effects.
Canadian tariff considerations
For our Canadian clients, and indeed for any parties interested in what might be described as a spat between normally friendly neighbours, here are some thoughts on U.S. tariffs in a Canadian context.
As a starting point, the threatened 25% universal tariff on Canada is fairly unlikely:
President Trump famously begins his negotiations with over-the-top demands to normalize less extreme positions later.
The threat of tariffs is being explicitly used as leverage to achieve other aims, with border security a prominent complaint against Canada. Canada is likely in a position to comply on this matter.
Tariffs, especially if reciprocated, would be damaging to the U.S. economy.
It would be hard for Trump to achieve his aim of lowering American energy costs if 4 million barrels of Canadian oil per day were suddenly much more expensive due to the impact of tariffs. However, the relative inelasticity of Canadian oil production argues a fair fraction of the tariff price hit would accrue on the Canadian side of the border.
It would be awfully hard for the U.S. auto sector to function under North American tariffs given the integrated North American supply chain. Wolfe Research figures that the average North American car would become US$3,000 more expensive – hardly a way to reduce U.S. inflation.
As argued in the prior section, smaller tariffs are a more likely outcome for Canada than the 25% threat.
The 2018—2020 North American tariff experience is instructive. Tariff threats were also made at that time to force the renegotiation of the North American Free Trade Agreement (NAFTA) and to achieve other U.S. aims. President Trump proposed 25% tariffs on the Canadian and Mexican auto sectors, and also suggested that the U.S. might leave NAFTA altogether if the deal was not reopened. Trump also threatened a 5% blanket tariff on Mexico that would increase by 5 percentage points every month until reaching a 25% rate if Mexico did not do more to address border security.
In the end, the U.S. implemented tariffs that were smaller than this, and also temporary. The auto sector was spared, and Mexico never faced an escalating tariff. Instead, the U.S. imposed a 25% tariff on foreign steel and a 10% tariff on foreign aluminum. In response, Canada imposed tariffs on C$12.6 billion of targeted U.S. imports, including bourbon, ketchup and steel. Mexico imposed US$3 billion in tariffs on American steel and foodstuffs. All of these tariffs were eliminated upon the signing of the U.S.-Mexico-Canada Agreement (USMCA) free trade deal in the spring of 2019. (Later, Trump briefly imposed a 10% tariff on Canadian aluminum in August to September 2020).
Key takeaways are that the implemented tariffs were smaller than those originally threatened, short-lived, and ultimately resolved via negotiations (and some concessions). It isn’t a carbon copy of the situation today – the degree of danger feels somewhat higher this time – but these approximate contours still sound about right.
As a new round of tariffs loom, a quick refresher of what Canada exports is probably in order (see next chart). In brief, oil and gas are by far the largest export, followed by transportation equipment (the motor-vehicle industry, significantly). Food, chemicals, primary metals and machinery then follow on the list. It would be difficult for Trump to levy significant tariffs on Canadian energy and transportation equipment, potentially cutting out 44% of what the country exports.
Oil and gas are by far the largest export from Canada to U.S.
How might Canada respond to U.S. tariffs? Likely in similar fashion to 2017—2020, especially with the same Liberal government in place for the moment (if minus negotiator-in-chief and former Finance Minister Freeland).
At essence, the two-pronged strategy would be reciprocated tariffs and negotiations/concessions.
Reciprocated tariffs
Canada would likely engage in a tit-for-tat strategy of deploying tariffs on U.S. goods that parallel U.S. tariffs on Canadian products. This isn’t to say that the economic damage would be equivalent. Canada would stand to lose to a greater extent as a share of GDP from both sets of tariffs given its deeper trade orientation – but this would be the price to pay to show the U.S. that Canada is serious about resolving the situation.
A list of American goods against which Canada might levy tariffs has apparently already been created, representing tens of billions of dollars of Canadian imports per year. Useful criteria for the list include products that are politically sensitive to Trump (perhaps produced in jurisdictions of Trump-aligned politicians), where Canadian demand is highly elastic (so that the price increase falls disproportionately on U.S. suppliers), and where there are viable non-U.S. substitutes (to minimize the disruption to Canadians).
Negotiations/concessions
To the extent American tariffs are designed to extract Canadian concessions, negotiations would be appropriate as a means of resolving the problem. Canada and Mexico fared surprisingly well last time, with a USMCA trade deal that was not entirely one-sided toward the U.S. It might be more difficult to secure such an outcome this time, and so concessions are almost certainly on the table for Canada. Potential areas for discussion include:
Border security – Trump wants to reduce the amount of illegal immigration and illicit drugs that enter the U.S. Canada is by far the lesser offender than Mexico but must nevertheless make a significant effort.
Defence spending – Trump wants NATO allies’ defence spending to rise. Canada’s is presently just 1.3% of GDP. Increasing this to 2.0% is likely the bare minimum. Trump has even talked about a 5.0% target (though we are dubious).
Digital services tax – The U.S. was not a fan of Canada’s digital services tax when it was first implemented in 2024. Canada will presumably be under pressure to eliminate it. The tax collects a share of revenues from large, mostly American technology firms whose digital services engage with and benefit from the data of Canadian users but whose profits are largely booked elsewhere. The U.S. could also challenge a proposed 5% tax on major U.S. streaming companies that is intended to fund Canadian content.
Canadian protectionism – The U.S. will presumably again target Canada’s supply management industries such as dairy and egg production, which enjoy a protective shield from U.S. competition.
Softwood lumber – Canadian softwood lumber is already subject to significant U.S. tariffs, but few trade spats exclude the controversial sector.
Buy U.S. goods – Might Canada be asked to purchase more U.S. goods to close the trade gap, much as China was asked to do so during the first Trump term? This is much more easily promised than done, but it is nevertheless an arrow in the U.S. trade quiver.
Reopen USMCA / sacrifice Mexico? – It is a near certainty that the USMCA trade deal will be reopened. The question is whether it happens immediately or in 2026 when the pact is formally subject to review. There are scenarios in which Mexico is sacrificed from the deal given its very different labour costs, border issues and Chinese transshipments. Alternately, a new deal including all three countries would likely focus on locking in additional minimum wage commitments from Mexico to reduce the country’s competitive advantage, and to further restrict Chinese transshipments through Mexico into the U.S.
Push for “Fortress AmCan” – To the extent Trump wants Canadian resources, this is an opportunity to further strengthen U.S.-Canada relations in a dangerous world. Perhaps the two countries can find ways to work more closely together, rather than to create artificial separation.
Backup plan
Finally, as a backup plan should negotiations fail to progress and U.S. tariffs prove sticky, Canada might consider:
Export taxes / export restrictions – In addition to taxing American goods coming across the border, Canada might choose to strategically tax or withhold certain strategic Canadian goods normally destined for the U.S. Obvious sectors might include Canadian oil and gas, electricity, minerals including potash and nickel, agricultural products like canola, and possibly even more exotic options like uranium or even water exports.
Flirt/deepen ties with Asia, Europe – While the scope for significantly shifting Canadian trade away from the U.S. is limited in the short run, Canada could nevertheless visibly flirt with other regions such as Asia and Europe. Canada could begin to deepen ties with these regions in a way that might contradict U.S. goals of securing North American resources for itself.
Unconventional options – There is no shortage of these. Articulated possibilities include airspace restrictions on U.S. aircraft (which frequently traverse Canadian airspace on the way to Europe and Asia), Canadian port restrictions for transshipped U.S. goods, non-tariff barriers that disadvantage U.S. products, etc.
In response to concerns that Canada’s prorogued government is in no position to negotiate or fight back, the country still has a Prime Minister, and existing legislation and World Trade Organization rules are more than ample for the country to respond to U.S. tariffs with trade barriers of its own.
The matter of providing fiscal support to adversely affected Canadian businesses and Canadians is a different question, and somewhat more difficult to address. But with a likely spring election, the scope for action would be on the order of months late rather than “never.”
With regard to the Bank of Canada, the debate around tariffs is always whether the central bank should focus on the loss of economic output or the increase in prices. Arguably, the former should dominate such that the central bank should cut rates rather than hike them in response to tariffs. The main reason is that tariffs represent a one-time price shock and so do not constitute persistent inflation. Conversely, the economic slack opened up can be persistent. The Canadian dollar would presumably also be somewhat weaker in the event of large tariffs, providing further economic support.
U.S. expansionism
Amid Trump talk of purchasing Greenland, offering to make Canada the 51st state, and proclaiming plans to retake the Panama Canal, the U.S. is clearly in an expansionist state of mind.
Fracturing international order
While most of these voiced aspirations are unlikely to be realized, it has to be conceded that the international order is fracturing in a way that renders previously improbable outcomes much more conceivable.
Internationally, 32% of the world’s international boundaries are disputed in some manner.
Although not on the scale of the redrawing of borders post-World War I and post-World War II, the world’s great powers are again pushing for additional territory in a manner that simply didn’t happen in the late 20th century or early 21st century. Russia has captured parts of Georgia and Ukraine and seeks more of the latter. Russia has also been more assertive in its Arctic seabed claims.
China has claimed the great majority of the South China Sea and is engaging in what amounts to island-building to legitimize that claim. It has also been constructing infrastructure in disputed territory with Bhutan and has skirmished on multiple occasions with India over disputed land on its western border.
Internationally, 32% of the world’s international boundaries are disputed in some manner. The great bulk of these are admittedly static grievances that do not escalate into truly fluid borders. The Middle East is especially notable for border disputes, and of course has a variety of open conflicts. Prominently, India and Pakistan have long disputed the Kashmir territory.
In contrast, the U.S. has for well over a century steered clear of attempting to expand its geographic footprint, preferring instead to project power via its popular culture and support for freedom/democracy and the international rule of law. But that could be changing as the world fractures into a multipolar era and as a new political era beckons in the U.S.
Already, major international bodies have been undermined.
A multipolar environment, and all the more so one in which the international order is fracturing, tends to be growth negative and inflation positive. Regional alliances dominate and global accords wither.
The World Trade Organization was greatly weakened during the first Trump term, and the organization’s dispute resolution system was paralyzed first by the Trump Administration and then by the Biden Administration’s refusals to appoint judges to the body to fill vacancies.
The United Nations Security Council has struggled to adopt new international resolutions as the U.S., Russia and China have frequently been at odds with the rest of the Council. The World Bank and International Monetary Fund have been undermined by some of the larger emerging-market nations that are dissatisfied with their lack of influence over the bodies, creating parallel institutions instead. Among these substitutes is the rapidly expanding BRICS organization, which now includes Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Indonesia, Iran and the United Arab Emirates.
Meanwhile, the Trump administration actively questions the purpose of NATO and has withdrawn from the Paris Accord (climate change).The administration has also announced its intention to withdraw the U.S. from the World Health Organization (the actual process requires a 12-month notice period).
Economic coercion is on the ascent. The U.S. is now using threats of economic damage in the form of tariffs to extract concessions from its trading partners. China has recently engaged in the same tactic against such trading partners as Australia, South Korea, Japan and Canada.
A multipolar environment, and all the more so one in which the international order is fracturing, tends to be growth negative and inflation positive. Regional alliances dominate and global accords wither. It is no surprise that tariffs and sanctions are rising in this era. These factors are encouraging friendshoring and onshoring rather than simply picking the cheapest supplier. As the big countries throw their weight around, small countries must pick their orbit or, more realistically, accept the orbit that has been chosen for them.
A history of U.S. expansionism
When the U.S. was first being cobbled together in the late 18th century, the original 13 colonies and the territory west to the Mississippi were acquired via the American Revolutionary War with Great Britain, displacing Native Americans.
The 19th century brought the idea of manifest destiny – that Americans were destined to fill the entire continent from the Atlantic to the Pacific. Accordingly, the Louisiana Purchase of 1803 – for US$15 million from France, which needed money and had lost interest in its dwindling colonial empire – doubled the size of the U.S. Texas was then annexed in 1845, which triggered the Mexican-American War. U.S. victory in that conflict in 1848 obliged Mexico to cede a large parcel of land, including what is now California.
The Guano Islands Act established in 1856 enabled citizens of the United States to take possession of unclaimed islands containing guano deposits (fertilizer from bird excretions). This marked the beginning of the Pacific Expansion and a new period of acquisition. Most of these were small and minimally inhabited islands, with the exception of Hawaii. The Pacific expansion ended with Hawaii’s annexation in 1898, which was the result of a complicated combination of military intimidation (though not war), economic pressure and political machinations.
In 1867, the U.S. acquired Alaska from Russia in a purely financial transaction, paying US$7.2 million.
Later, the Spanish-American War of 1898 netted the U.S. control of Puerto Rico, Guam and the Philippines. Practically speaking, these acquisitions were the spoils of war, though the U.S. did pay US$20 million to Spain as part of the peace treaty signed later that year. With the exception of a brief period of Japanese occupation from 1942 to 1945, the Philippines was controlled by the U.S. from 1898 to 1946, at which point the country gained its independence post-World War II.
The last major U.S. territorial acquisition was the Panama Canal Zone in 1904 – an unincorporated U.S. territory within which the U.S. constructed the Panama Canal.
The last major U.S. territorial acquisition was the Panama Canal Zone in 1904 – an unincorporated U.S. territory within which the U.S. constructed the Panama Canal. After Colombia rejected initial U.S. overtures, the U.S. supported a Panamanian independence movement and then received permission to take control of the zone from the new government of Panama shortly thereafter. After Panamanian dissatisfaction with the ownership arrangement, a treaty signed in 1977 relinquished control of the canal to Panama in 1999.
This is all fascinating in its own right, but what does this tell us about U.S. expansionist aspirations today? As a starting point, it has been a long time since the country’s most recent geographic expansion, in 1904. The last time the U.S. acquired land that would eventually become a state was in 1898, with Hawaii. That points to a fairly high bar for further acquisitions. However, the bar is lowered somewhat by the fact that the international order is today under stress and an unconventional president now occupies the Oval Office.
Historically, U.S. acquisitions have been due to war victories (American Revolutionary War, Mexican-American War, Spanish-American War), financial acquisitions (Louisiana Purchase, Alaska), annexations (Texas), and a complicated interplay of military might, economic interests and political machinations (Hawaii, Panama Canal Zone).
Outright war seems rather unlikely in the context of President Trump’s current focus on Greenland, Canada and the Panama Canal. It is also unlikely that any of the regions would cede their sovereignty voluntarily, or over purely financial inducements.
Somewhat more likely is that the Panama Canal remains Panamanian but is convinced to prioritize U.S. vessels, lower the transit fee for U.S. vessels, and/or reduce Chinese influence over the area.
Trump’s most forceful comments in his inaugural address related to the Panama Canal. One could conceive that a combination of military might, economic interests and political machinations could bring the Panama Canal back under U.S. influence. However, somewhat more likely is that the Panama Canal remains Panamanian but is convinced to prioritize U.S. vessels, lower the transit fee for U.S. vessels, and/or reduce Chinese influence over the area.
There is perhaps a certain geographic logic to a closer Greenland affiliation with North America in general and with the U.S. in particular, as the dominant North American political actor. However, it is hard to fathom Denmark or Europe rolling over on this matter. Perhaps there is scope for a preferential free trade deal between Greenland and the U.S., or to smooth the way for additional U.S. resource extraction in Greenland (though this is already permitted and U.S. companies are present).
Canada becoming the 51st state is, of course, extremely unlikely. Canadians don’t want it, Trump’s comments are closer to an invitation than a threat, and previous attempts by the U.S. to claim Canada were rebuffed (with Quebec after the Revolutionary War, the War of 1812, “54-40 or fight” between 1818 and 1846, and proposals that the Union army invade Canada immediately after the American Civil War). Practically speaking, the U.S. can already access Canadian resources via free trade and also via U.S. companies operating within Canada.
Economic data
The economic data has taken a back seat to all of the remarkable political pronouncements and risks that presently swirl. Still, there are several things to discuss on this front.
As a starting point, the U.S. 10-year yield has helpfully retreated over the past few weeks. It has fallen from a peak of 4.79% on January 14 to just 4.52% on January 27. That’s the equivalent of a few rate cuts worth of easing.
Speaking of easing, or in this case, a lack of easing, this week’s U.S. Federal Reserve decision is likely to result in an unchanged policy rate, keeping the fed funds rate at 4.25%-4.50%. If delivered, this will be the first pause after three consecutive cuts.
A pause seems likely for several reasons.
The market widely expects it, and substantial surprises are unusual for this variable.
The economy has been distinctly strong, arguing against further rate cutting.
Inflation remains too high, even if the December numbers managed a slight improvement. The problem is that oil prices (though lower than they were a few weeks ago) are still higher than a few months ago. The inflation numbers are thus unlikely to get a whole lot better in the coming month.
Remaining on central banks for a moment longer, the Bank of Japan delivered a much-anticipated rate hike, doubling its policy rate from 0.25% to 0.50%. The country continues to march to its own drummer. Inflation is higher than the country is accustomed to and spring wage settings appear destined to arrive at a strong +5% year-over-year (YoY).
China’s fourth-quarter GDP substantially exceeded expectations, conveniently delivering a +5.4% YoY performance that allows the country to claim victory in its 5% growth target. We look for closer to 4% growth this year.
China has kept a low profile recently, barely eliciting a mention from President Trump in his first week in office. That’s arguably to the country’s advantage. In terms of recent data, China’s fourth-quarter GDP substantially exceeded expectations, conveniently delivering a +5.4% YoY performance that allows the country to claim victory in its 5% growth target. We look for closer to 4% growth this year.
Recent leading indicators argue that Chinese growth may indeed have slowed slightly at the start of the year. The country’s Manufacturing Purchasing Managers’ Index (PMI) declined from 50.1 to 49.1 (into mild contraction territory) in January. Its Non-manufacturing PMI fell from 52.2 to 50.2.
The question will now be how much stimulus the country delivers in response. The latest small push is that the government is again encouraging its investors to purchase more Chinese shares. Unfortunately, Chinese data becomes hard to interpret over the next few months as Lunar New Year holidays distort the numbers.
Canadian data
Canada’s population growth is beginning to slow, on schedule. After incredibly fast growth over the prior three years, the recent abrupt changes to immigration policy are starting to have an effect (see next chart). We budget for a significant further deceleration over the next several quarters. This, in turn, represents a headwind to short-run Canadian economic growth, though we are hopeful that the combination of rate cuts and reviving productivity will plug most of the hole.
Canada’s population growth dropped as federal government cut immigration
The Bank of Canada is also scheduled to deliver its next decision this week. A 25-basis-point rate cut seems likely, taking the policy rate down to just 3.0%. The existence of significant Canadian economic slack is the best argument for this movement.
The country’s latest inflation print is also supportive of easing, at least on the surface. Inflation descended to just +1.8% YoY in December. Core inflation metrics also improved slightly.
But the inflation numbers probably flatter the true situation slightly, as the country’s temporary sales tax cut in December reduced the inflation number. Once that expires, in combination higher oil prices and some less favourable base effects, we figure Canadian headline inflation could be up to 2.3% or 2.4% come spring. This isn’t too bad, but neither can it be said that the work is entirely done.
Fortunately, Canada’s Business Outlook Survey argues that inflation pressures are easing. Few firms are reporting that they are overheating (see next chart). Labour shortages have also abated (see subsequent chart).
Increasing share of Canadian firms reported excess capacity
Canadian labour market has cooled significantly
Expected wage growth is also dimming, potentially removing another persistent inflation pressure (see next chart).
Wage pressure in Canada has eased
As it happens, the Business Outlook Survey also shows diminished pessimism among Canadian businesses (see next chart) and rising sales expectations (see subsequent chart). Firms also appear to have rising business investment plans and slightly more positive hiring plans (see third chart).
Canadian Business Outlook Survey Indicator has become less negative
Canadian firms expect future sales to improve
Canadian firms’ investment intentions and hiring plans have increased
The takeaway from all of this is that, despite weakening population growth and the threat of tariffs, the Canadian economy is moving forward and perhaps even accelerating slightly. We continue to forecast more growth in 2025 than in 2024, albeit somewhat back-weighted to the second half of the year – when tariff fears have hopefully proven overblown, rate cuts have worked their lagged way into the economy, and productivity has begun to revive in earnest.
-With contributions from Vivien Lee, Aaron Ma and Ana Ardila
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