An Update on Tariffs from the Multi-Asset Management Team

Following an announcement on February 1st from President Donald Trump, it was confirmed early on Monday February 3rd that Mexico and the U.S. had reached a deal to postpone the tariffs for a month on the grounds that Mexico deploys 10,000 troops to the countries’ border. Later on Monday, Trudeau announced that a deal was also reached to postpone tariffs by 30 days provided Canada completes a variety of activities to reinforce the border to prevent fentanyl and other illegal substances from entering the U.S.

In case you missed it, the Tariffs that were threatened on key trading partners, including Canada, Mexico, and China include: 

• 25% Tariff on Canadian and Mexican Imports: This applies to a wide range of goods, with a notable exception for Canadian energy products, which will incur a 10% tariff instead.
• 10% Extra Tariff on Chinese Goods: This 10% is in addition to current tariff levels.
• Revocation of the De Minimis Exemption: This change means that Canadians will have to pay duties on online purchases from the U.S.
• Escalation Clause: The order includes a provision that could increase tariffs if Canada retaliates.

The market response to tariff news before the deal was announced was volatility given the amount of uncertainty. Markets never react well to uncertainty and this situation was no exception with lower equity markets, a stronger US dollar, a stronger yen, and falling interest rates, reflecting recession concerns more than inflation concerns.

Canadian yields fell sharply on the initial news on Monday morning as the bond market was fearing a big growth shock and anticipating the Bank of Canada’s response. This scenario would be favourable for fixed income funds (remember prices appreciate when yields fall). The Canadian dollar initially fell sharply but has since recovered much of those losses, even outperforming some European currencies like the euro.

Looking ahead, if a long-term deal is not met during the 30-day period, we will likely see more volatility, and this will likely be the dominate theme in the near-term. However, we may not see this scenario play out – there is still so much unknown. As investors, the best thing to do during uncertain times is focus on the long-term and being prepared. We don’t know what will happen so being prepared with a resilient portfolio that is well-diversified with investments in a variety of geographies, sectors, and asset classes is a great remedy. Besides, trying to time the market on short-term fluctuations is rarely successful because no one has a crystal ball.

Our hope is that a long-term deal is reached between the country leaders but if things are not resolved within 30 days, a trade war risks disrupting global economic activity and fueling inflation. This is especially true in sectors reliant on cross-border supply chains. Consumer spending, corporate earnings, and financial markets may also face volatility. The broader impact depends on the duration of tariffs. Long-lasting tariffs could hinder growth through lost export revenue and higher unemployment.

Canadian retaliatory tariffs that were initially announced targeted specific goods with non-U.S. substitutes to minimize cost increases and inflation risks. Fiscal and monetary policies can support the economy if tariffs persist. The Bank of Canada’s current policy rate of 3% allows room to lower rates, similar to the the COVID-19 response. Canadian and Provincial governments could introduce fiscal stimulus and employment programs, using revenue from retaliatory tariffs to support affected businesses and individuals. 

While the U.S. and its North American trading partners have reached a tentative agreement, there is still a lot of uncertainty surrounding this very fluid situation. Based upon the events of Monday February 3rd, the goal of President Trump is likely not the tariffs but driven by the desire for border protection. At the time of writing, China and the U.S. have not reached a deal and if tariffs go through for Chinese goods, this could have inflationary impacts on the American consumer. While it may sound mundane, the best strategy for investors is to stay focused on the long-term – avoid speculation and emotional decision-making is key during these challenging times. As trusted stewards of client’s capital, this is exactly what we’re doing - focused on prudently assessing the impact of any long-term policy changes on the investments we manage – in other words, we keep calm and manage on.