Watch: Trade War Impact
Trade Wars Escalate
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Catharine Sterritt, Associate Portfolio Manager, CIBC Asset Management
We've had the U.S. move ahead with tariffs on aluminum and steel against Canada. There had been a lot of expectations that we were going to get another extension in order to facilitate the NAFTA talks moving ahead. And so now we have a situation where it is clear that NAFTA has fallen down. We may have a significant delay and uncertainty into the new year and in the meantime we have our manufacturers having to deal with these tariffs. But what makes it all the more critical is the fact that we have a new threat which is tariffs against the import of automobiles. Those tariffs would probably be four times the value and impact of aluminum and steel, just by the extent of the amount of trade between Canada and the U.S. on auto. 85 percent of all auto production in Canada is going to the U.S. And so the risk is that if they're prepared to have tariffs on aluminum and steel that we're going to have it on auto next.
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Is NAFTA dead?
There's been this expectation that if we aren't able to come to an agreement on NAFTA it will simply be that we'll go to WTO. Two to six percent tariffs and the Canadian dollar can adjust for it and we can carry on. And that that would be preferable to onerous terms on NAFTA that don't make sense for the country. So here's the U.S. turning around and saying: "No, it's not going to be WTO. It's going to be 25 percent. It's going to be crippling. So you need to come to the table and you need to accept our terms." Whether we see Canada or Mexico break and give concessions and have an early NAFTA, if we do it's going to be at terms that are not favorable to Canada. Or do we take the risk that we get four months down the road and this Department of Commerce exercise on national security comes back the same way it did aluminum and steel and brings in the auto tariffs. And it's not about national security at all. It just happens to be the legal mechanism in the U.S. that allows the president to set tariffs instead of Congress.
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What’s next?
It is a critical time because from Canada's perspective we are a trade nation. Manufacturing is very much dependent upon the U.S. market and we're in a situation where we're already at a tax disadvantage because of the U.S. tax reform. We're at an investment disadvantage because the U.S. has introduced the accelerated depreciation that encourages CapEx to happen there. And now there is a situation where there's tremendous uncertainty on what the tariff regime is going to be and the whole point of this isn't that the U.S. government and the Trump administration is trying to shut out Canadian manufacturing and Canadian imports and have an impact on the Canadian economy. This is all about jobs in the U.S.
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Potential impact for Canadian companies?
There is a danger that we're going to have a weaker Canadian dollar. It's a way to make our exports more competitive. So when you're looking at companies you're going to take into consideration what companies benefit from a weaker Canadian dollar. So companies that are vulnerable to a trade war and are vulnerable to a weak Canadian dollar is our retailing industry. Like when you go into the store it's all of these imported goods and they're going to come in at a pricing disadvantage because of our weaker dollar and because of tariffs. It's going to make it more difficult for that sector to perform. On the other hand major Canadian banks that benefit from the interest rate spread and a rising interest rate environment, but also have made substantial U.S. investments themselves over the past three to four years, we think are very well positioned to perform in this environment.