Tag Archives: trade war

Coping with Market Smackdowns

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By Mark Seed, myownadvisor

Special to Financial Independence Hub

Hey Everyone,

Welcome to some new Weekend Reading, the market smackdown edition.

In case you missed any recent posts, here they are!

Before I started semi-retirement/part-time work this month, I shared some big retirement mistakes I hope to avoid in the coming years.

After reading about a 23-year-old athlete earning $2 million, I wondered if he was “set for life”?

And finally, I shared our latest dividend income update below – despite the stock market going down our income stream went up! Continue Reading…

Trump Tariffs lead to Trade War: What investors can do now

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Image via Pixabay

By Kyle Prevost, MillionDollarJourney

Special to Financial Independence Hub 

With so many Canadians plugged into the latest Trump Tariff news, I felt that I needed to get an updated trade war column out as soon as possible!

So what I’m going to do today is update an article I wrote back when we were taking our first baby steps into Trump Tariff reality. Below you’ll see a ton of info on what tariffs are, what Canada’s situation is in regards to the big picture effect on our economy, and finally, what the impact is likely to be on your portfolio.

But first, just to bring you up to speed, here’s what the President announced in his big “Liberation Day” speech – complete with grade-five-science-fair-style cardboard visual aid.

  • A baseline tariff of 10% will be imposed on nearly all imported goods from all countries. This tariff is set to take effect on April 5, 2025
  • Canada and Mexico will not – for the moment – be part of that 10% baseline tariff.
  • Canada and Mexico trade is basically now broken up into three categories: goods that are USMCA-compliant, goods that are not UMSCA-compliant, and goods that are in sectors that Trump wants special rules for.
  • USMCA-compliant goods are actually in the best spot of any imported goods in the world right now – as they get to enter the USA tariff-free!
  • Goods that are not UMSCA compliant are still under the 25% “Fentanyl Tariff” rules.
  • We already knew about potash and fossil fuels having their own 10% tariff rules, but it appears that lumber, steel, and aluminium will continue to have their own special place on the Trump Tariff list as well.
  • Likely the biggest Canada-related news was that the 25% tariff on automobiles will be applied to Canadian-made vehicles (despite the USMCA explicitly outlining this as being illegal).

In regards to the rest of the world, the most noteworthy developments were:

  • An additional 34% tariff on China, resulting in a total tariff of 54% when combined with existing duties.
  • European Union: A 20% tariff.
  • Japan and South Korea: 25% and 24% tariff respectively.
  • India: 26% tariff.
  • Vietnam: 46% tariff.
  • Many many many other tariffs.

As we hit publish on this article, countries around the world were announcing retaliatory tariffs and US stock market futures were showing that the overall US stock market was set to lose 4% as it opened on April 3rd.

The best quote that I heard in regards to summing up this whole mess was from Flavio Volpe, president of the Automotive Parts Manufacturers’ Association who stated that the new tariff situation was “like dodging a bullet into the path of a tank.” He went on to write, “The. Auto. Tariff. Package. Will. Shut. Down. The. Auto. Sector. In. The. USA. And. In. Canada,” and then, “Don’t be distracted. 25% tariffs are 4 times the 6/7% profit margins of all the companies. Math, not art.”

It appears that the rest of the world is finally waking up to the same reality that Canada and Mexico have been experiencing for the last two months. There’s much more that could be written about the gnashing of teeth and simply incredible quotes from the President such as, “An old-fashioned term that we use, groceries. I used it on the campaign. It’s such an old-fashioned term, but a beautiful term: groceries. It sort of says a bag with different things in it.”

Oooook.

For now, take a deep breath and read what I had to say a month ago in regards to your stock portfolio. The reality was true then, and it’s true today. In my predictions column back in late December I wrote:

“One of the most pressing questions for Canadian businesses in 2025 is whether the newly elected U.S. president will follow through on his promises of large tariffs on Canadian imports.

Trump’s fixation on trade deficits could lead to a significant shake-up in the global economy. He appears intent on generating tariff income to support the legislative groundwork for corporate tax cuts. His “national security” justification may lack substance, but it could still trigger sweeping trade policies. 

I don’t actually believe that Mr. Trump understands how trade wars actually work, and he hasn’t cared to learn anything new in several decades. So the hopes better angels will talk him out of this are perhaps misplaced.

I believe even more strongly that the President-elect doesn’t understand how trade balances work, and consequently, he does not understand that in buying goods from Canada with a strong US Dollar, his constituents (US consumers) are winning! There is no “subsidization” of Canadian business going on here. 

While a blanket 25% tariff on all Canadian goods seems unlikely, a more targeted 10-15% tariff on non-energy products feels probable. If that happens, Canadian businesses would face a challenging environment, and retaliatory tariffs from Canada could escalate tensions further.

My guess is that we’ll see some major disruption in Canadian manufacturing, with supply chains snarled, and some factory commitments being delayed indefinitely as companies decide to move more operations within the USA for the next few years at the very least. I’d also be pretty worried if I was a farmer and/or worked in the dairy industry. Some of these tariffs might come off when the overall North American trade deal is finalized.”

I’d say that held up pretty well!

The key here is definitely not to panic. The Canadian stock market has actually held up pretty well so far – and as always, it’s key to remember that the vast majority of the companies in Canada’s stock market DO NOT depend on selling specific goods to the USA. It’s also worth noting that a lot of companies that weren’t previously UMSCA-compliant are likely to become so in a hurry. If that happens, there might actually be a lot of Canadian companies in an enviable position relative to the rest of their global competitors as they will have no tariff to worry about (for now) versus 10%-50%+ for other countries.

This isn’t going to be good for any of the world’s economies, but the Trump Tariffs are already proving very unpopular with US Citizens and even among Republican politicians. Read on for more detailed reasoning on why you don’t need to do anything drastic in the face of these latest Trump tariff developments, and the broader US – Canada Trade War that has now expanded to include the rest of the world.

Trump (Delayed) Tariff Details

So – what is a tariff anyway?

A tariff is a tax by a government on foreign goods coming into a country. The import company (or person) pays the tax to the US federal government. In the vast majority of cases, the company then turns around and sells the imported product for a higher price (and possibly also takes a hit to their profit margin).

Trump’s tariff summary:

  • A 25% tax on all imports – aside from oil. This happens on Tuesday, February 5th.
  • A 10% tax on oil. This is supposed to kick in on February 18th.
  • Mexico will see a 25% tax on all of its imports.
  • China will get a comparatively light 10% tariff on its imports.
  • Canada will respond with two-phases of tariffs in response. They will total $155 billion of US goods.
  • Mexico hasn’t finalized details but announced tariffs ranging from 5% to 20% on US imports including pork, cheese, fresh produce, manufactured steel and aluminum.

If you’re wondering what we send to the USA – it’s a lot (we don’t have 2024 numbers finalized yet).

top us imports canada
Source: CBC News
trade dependancy
Source: Council of Foreign Relations

The potential fallout from U.S. tariffs looms large. If the worst-case scenario unfolds and these tariffs stay on Canadian companies for more than a month or two, economists estimate it could push Canada into a three-year recession, shave three percentage points off our GDP, and wipe out 1.5 million jobs. While forecasts vary, one thing is clear – the economic risks are significant. It would likely be even worse for Mexico.

The USA isn’t going to get off the hook easily either. Predictions range between their GDP shrinking .3% to 1%. That range doesn’t give a precise picture of the fact that counter-tariffs will be heavily targeted with the goal of inflicting maximum pain to companies that are important to Republicans’ electoral chances. I wouldn’t want to be in the US alcohol or consumer goods business right now.

American consumers are going to immediately see higher prices on agricultural goods, lumber (which means more expensive houses), gasoline (especially in the midwest), and vehicles.

When it comes to cars, the idea that the tariffs will somehow shutdown Canadian factories and move them to the USA overnight is ridiculous. What will happen is that the complex supply chains involved for North American manufacturers will get much more expensive, and consequently it will make the final product more expensive. Continue Reading…

Forget the Trade War, already: China is cutting Taxes

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By Jeff Weniger, WisdomTree Investments

Special to the Financial Independence Hub

The market’s obsession with trade wars may finally be exhausted and priced in. Move on to the next market mover: massive Chinese tax cuts, which should aid the WisdomTree ICBCCS S&P China 500 Index ETF (CHNA.B), our tracker exchange-traded fund for the country.

Sure, China exported US$457 billion (C$597 billion) of goods and services to the U.S. in the year through June, and some fraction of those exports is at risk from a deterioration in Sino-U.S. relations. But engage a drastic scenario: lop off US$200 billion or US$300 billion from that figure. Even if that happened, most of that sum wouldn’t even disappear; it would be sold elsewhere, maybe inside China, at concessionary prices. But even suspending logic and having it all vanish, is it really doomsday for China’s US$14.1 trillion economy (US$25.2 trillion at purchasing power parity)? We don’t want to minimize the importance of trade conflicts, but the airtime given this topic is hysterical.

When Obama was in office, many conservatives and free market acolytes convinced themselves he would destroy the U.S. economy, so they ignored massive fiscal and monetary stimulus — the data — and missed the equity bull market. Emotions ruled; logic lost.

Now it’s happening with Trump. Among some investors, emotions are defeating data. The recent Bank of America Merrill Lynch fund manager survey pointed to a trade war as the market’s biggest risk. Some investors so badly wish Trump to fail that, like conservatives during the Obama years, positive news is simply ignored. Forget Japan’s major trade deal with the EU, ink still wet. Forget Trump’s meeting with Jean-Claude Juncker, European Commission president, where they agreed to work toward zero tariffs. The end is near!

Astute investors need a sober, facts-based thesis.

A Thesis without Emotion

A more realistic take on matters is that China finds itself isolated, unable to pair with Moscow in a two-country geostrategic counterbalance to the West. This forces Beijing to backtrack on intellectual property theft, inordinately high tariff levels, state subsidies and dumping because of its weak bargaining hand.

The pain must be offset, so Beijing gives the market that for which it aches: trillions of dollars in tax cuts at the business, product and personal income tax levels. Yes, Trump’s ability to stir the pot is important, but mathematics matters.

Chinese equities are the play here.

Bold actions

We calculate that many Chinese will see their personal income tax liability fall by half or more, effective January 1, 2019. Add to this our estimate of nearly US$500 billion in value-added tax cuts over the next decade, with still-in-the-works business tax relief on top, which would be another US$132 billion to $138 billion if activity grows at a pace of 6% to 7%. For perspective, Beijing’s Lehman-era US$586 billion spending package, hypothesized by some to be the reason the Global Financial Crisis ended, is smaller than 2018’s total announced tax cuts, if we calculate them over several years. This is this year’s big story.

Income Tax Scenarios: Implications for everyday Chinese

The proposed personal income tax code changes are staggering (figure 1). Exemptions and the minimum bounds for the 10%, 20% and 25% brackets are set to gap higher, while tuition, medical and mortgage deductions add to the savings.

Figure 1: China Personal Income Tax Code 

If these become law in October and are implemented in January, someone making CNY15,000 per month (C$2,906), a wage that is common in a city like Shanghai, where 2017 median monthly income is $2,048, would see their monthly taxes cut by CNY1,080 (C$209).1The person making half that amount, or CNY7,500 per month, which is short of the metropolitan median, would save about C$500 per year on an income of C$17,437. This is serious.

Chinese Equity Valuations

With many Chinese equity markets hammered this year, the S&P China 500 Index’s forward P/E multiple has fallen to 11.7, a sharp discount to the S&P/TSX Composite Index of Canadian equities (P/E of 15.8).2  Continue Reading…

Canadian Trade Relations: The wrong place at the wrong time

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By Jeff Weniger, CFA, WisdomTree Investments  

Special to the Financial Independence Hub

The 24-year-old North American Free Trade Agreement (NAFTA) has never been this close to death, but a resolution could be behind the storm clouds.

Souring trade relations with the U.S. are a shame, because Canada got caught in the wrong place at the wrong time. Consider figure 1. President Donald Trump wants to make a dent in the US$388 billion annual trade deficit with China and, to a lesser extent, the yawning gaps with Mexico, Germany and Japan. But to show strength to them economically and North Korea militarily, he believes he has to treat even friendly actors such as Japan and Canada like hostile players. That became apparent when the U.S. administration imposed global steel and aluminum tariffs, and Canada wasn’t exempted.

Figure 1: Monthly U.S. Trade Deficit/Surplus (USD in Millions)

Monthly U.S. Trade Deficit/Surplus

Talks are starting to get personal, with U.S. President Donald Trump accusing Prime Minister Justin Trudeau of making false statements at a June news conference after G7 leaders met amicably. The Canadian leader then got relatively tough, responding that “Canadians … will not be pushed around.”

With the world’s two best friends in a lovers’ quarrel, the US$13 billion annual U.S.-Canadian trade gap, a rounding error, is somehow a political issue. It could have been resolved over golf.

But not all is lost. Ottawa would be wise to consider — if it is legal — scrapping NAFTA for a bilateral trade agreement with Washington.

Canada ill-advised to sit at table with Mexico

That’s because Canada is ill-advised to sit at the table with Mexico to try to strongarm the U.S. Not now, in 2018, given Mexico’s own specific troubles. Frankly, Mexico’s negotiating calculus is much weaker than Canada’s. The country went to the polls July 1, and leftist Andrés Manuel López Obrador (AMLO) won.  He won’t help Canada one bit because it isn’t politically palpable for him to shoot for a quick resolution. Hostility to the U.S. — or at least standing ground against Washington — has been a political winner for the Latin American “pink tide”1 for years. Playing the tough-talk game with Trump will be one of AMLO’s key rallying cries, and it can only cripple NAFTA. Continue Reading…