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US Tariff War on Canada
With February approaching, there's a major deadline looming – the month when Trump could launch his global trade war. A 25% tariff is being proposed for both Canada and Mexico, and they could be the first targets. Many believe Trump's threats are idle, but we must take them seriously because he holds the power as President of the United States. This is not just political posturing – Trump has made it clear that tariffs are a key part of his strategy. He aims to return the US to the economic policies that once made it more prosperous and powerful.
Historically, between 1870 and 1913, the US was highly dependent on tariffs, and this was one of its richest periods in history, at least by global standards. Trump argues that instead of taxing Americans to enrich foreign nations, the US should levy tariffs on those nations to benefit US citizens. Essentially, lower taxes for Americans would be offset by higher tariffs on foreign goods. This approach is serious – Trump isn’t kidding. Just as he weaponized the dollar, Trump intends to use the US consumer market as a financial tool to extract money from around the world. However, this is likely to backfire because tariffs are ultimately paid by the consumers.
Nevertheless, the trade war is charging ahead. Janet Yellen’s replacement, Scott Besson, has been confirmed and he’s one of the architects behind this tariff strategy, aiming to raise tariffs globally from zero to 20% in small increments, with Trump pushing for even faster implementation. This won’t just affect China, but will hit all trading partners, including the G7, Asia, and Latin America. For anyone exporting to the US, the pressure is about to intensify.
What does this mean for the world? First, expect a slowdown in global GDP growth, especially in countries that rely heavily on trade with the US. A global currency crisis could also be on the horizon. The US dollar index has already risen as a result, and since global trade is still dominated by the dollar, the cost of imports will increase worldwide. This means that whether you're in Japan, Singapore, Europe, or the UK, expect to pay more for everything – from utility bills to groceries and even Amazon shipments.
If you’re looking for the cause of these rising costs, look no further than the looming US tariffs. This is yet another reason why the world needs to start distancing itself from the financial dominance of the US. But let’s zoom in on Canada, which is about to bear the brunt of these tariff pressures and is already in panic mode.
Reducing Oil Exports to the U.S.
The Canadian Finance Minister, who has aspirations to become Prime Minister, is calling for a coalition against the U.S., urging all countries targeted by Trump’s trade war to unite, forming something like a B-grade version of The Avengers. This coalition would include Mexico, Denmark, Canada, Panama, and the EU. It’s both amusing and tragic to see how even U.S. allies are beginning to lose their patience. Trump has been mocking Canada almost daily, pushing for Greenland and control of the Panama Canal, which has left countries around the globe nervous.
So, what does Canada have planned in response? Despite the pressure, Canada is far from powerless. The first strike will be tariffs on $15 billion worth of U.S. products entering Canada. This marks the first significant blow to the U.S. economy, targeting sectors like the auto industry, consumer goods, chemicals, and machinery. If your goods are coming from the U.S. to Canada, be ready to pay more.
It's important to note that trade wars tend to result in no winners—both economies will feel the pain. Inflation will rise, economic growth will slow, and living standards in both the U.S. and Canada will likely decline. According to the Tax Foundation, if the U.S. imposes a 25% tariff on Canada and Mexico, the consequences would be severe. U.S. GDP could fall by 0.4%, with the loss of 340,000 full-time jobs. On the Canadian side, GDP would drop by 0.3%, and 280,000 jobs would be lost. Interestingly, China would be the least affected by the trade war because its exports are not solely reliant on the U.S. However, Canada and Mexico face a very different reality.
But things could get even more complicated for the U.S. under Trump’s plan, which seems contradictory. On one hand, he wants U.S. oil companies to thrive; on the other, he wants to lower oil prices. Trump's strategy includes tapping into the Strategic Petroleum Reserve, imposing sanctions on Iranian oil, placing a 25% tariff on Canadian oil, increasing demand for electric cars, and lowering the cost of living for Americans all at once. Ultimately, Trump will have to make a tough choice.
What was revealing in Davos was Trump’s admission that the U.S. economy is struggling to handle higher interest rates. He urged global central banks to lower rates to boost growth, indicating the fundamental weakness of the U.S. economy. This makes Canada’s role even more critical, as it holds something essential the U.S. needs—cheap and abundant energy. And this is why Canada’s position in the global trade landscape is so vital.
Backfire on US Industries
The "nuclear option" of energy export restrictions to the U.S. is very much on the table, and it’s crucial to understand how vulnerable the U.S. economy is to Canadian oil. While it’s not as extreme as Europe’s dependence on Russian gas, it’s still a major factor. The U.S. imports 4.4 million barrels of crude oil a day from Canada—the highest level since June 2010. This crude goes straight into U.S. refineries, where it's processed into gasoline and diesel, directly fueling the U.S. economy. In fact, Canadian oil makes up 52% of total U.S. imports, which is three times more than oil from OPEC countries. If this supply were cut off or becomes more expensive, U.S. inflation would certainly rise, putting Trump in a tough spot. Can he afford to let inflation spiral?
This creates a dilemma for Trump, who is already facing pressure to incentivize companies to move their manufacturing operations back to the U.S. We’re hearing more and more about tariffs and punishments, but in the near future, we may see tariffs on the production of critical goods like computer chips, semiconductors, and pharmaceuticals. These industries, which largely shifted overseas to places like Taiwan (where 98% of chip production takes place), need to come back to the U.S. Trump’s approach is to avoid giving companies billions of dollars in subsidies, like the current programs under Biden’s administration. Instead, he wants companies to be motivated by the threat of steep tariffs—25%, 50%, or even 100%. The incentive is simple: if companies don’t want to face these taxes, they need to build their factories in the U.S.
Trump’s version of an "incentive" is essentially avoiding punishment. It’s not about carrots; it's all about making companies feel the sting of tariffs unless they set up shop in the U.S. For manufacturers based in Taiwan or the Middle East, this could be an unattractive proposition. They’ll have to deal with a whole new set of challenges if they want to avoid tariffs by shifting production to the U.S.
A key part of this equation is cheap energy, and losing Canadian oil would be a significant blow to U.S. manufacturers. In 2023, the U.S. enjoyed an $18 discount per barrel on Canadian oil, which provided substantial savings. If that disappears, it will make it even harder for U.S. manufacturers to compete, especially with China. Cheap energy is a major driver of manufacturing, and without it, the U.S. could find itself in a tougher position in the global market. There’s also another issue looming that could exacerbate this problem.
Energy Supply to the U.S. at Risk
The U.S. won’t hold the title of the world’s largest consumer market forever. By 2030, Asia will dominate, with over a billion consumers in China, nearly 800 million in India, and 160 million in Indonesia. These are rapidly growing markets, and one thing they all have in common is their membership in BRICS. This shift is making manufacturing in the U.S. less appealing.
Let’s say you’re a German company considering moving production to the U.S. You’d have access to 350 million American consumers, and while they may pay higher prices, here’s the catch: because your products are more expensive to make in the U.S., you won’t be able to export them profitably to the rest of the world. This is one of the reasons many companies opt to base their operations in China. In this context, Canada’s economic position is actually pretty strong. While Canada is heavily reliant on the U.S., Trump’s policies also make the U.S. dependent on Canadian energy.
This dependency extends beyond oil. Since 1909, Canada has been supplying electricity to the U.S. Nearly every Canadian province is electrically connected to at least one U.S. state. This sets the stage for a significant energy showdown. The U.S. not only relies on Canadian oil but also on cheap Canadian electricity. In fact, Canada is the largest exporter of electricity to the U.S., selling over $3 billion worth, while the U.S. only exports about $1 billion worth back to Canada.
Because Canada can generate power more cheaply, it plays a crucial role in U.S. energy needs. If U.S. power plants go offline due to a shutdown or a natural disaster, the U.S. would need electricity quickly. A cold snap, heatwave, or flood could push Trump to rely on Canadian electricity. In such emergencies, there’s no time to build up surplus power—getting it from Canada on demand isn’t just a cost issue, it’s a national security concern for the U.S. So, the stakes are very high.
It’s not just the energy sector that’s at risk. The U.S. also depends heavily on intermediate imports from Canada—critical materials for manufacturing. Canadian steelmakers, for example, are already refusing to supply U.S. customers due to tariffs. Who can blame them? If Trump imposes a 25% tariff, their buyers might cancel orders or refuse to absorb the cost. A 25% tariff on steel is enough to completely wipe out any profit margin. This is the kind of challenge faced by all of Trump’s trade war targets.
Global Trade War Ahead
The tariffs are likely to backfire, as they have in the past. Sure, some jobs might return and certain industries may rebound, but companies manufacturing in the U.S. will have to face a tough reality: whatever they produce in the country will struggle to compete with exporters like China. Let’s revisit the steel example. In 2023, the U.S. imported the most steel products from Canada and Mexico. If a 25% tariff is slapped on all imported steel, the cost of steel will rise. So, where will the U.S. source it from? Brazil or South Korea could be alternatives, but the shipping costs would be far higher than importing it from neighboring countries. This presents a big dilemma for Trump—he seems to think he can impose tariffs on the world without facing consequences, but that’s no longer a viable strategy.
Here’s the concerning part: we can expect Trump to try and make it work regardless. His goal is to bring manufacturing back to the U.S. at any cost. The collateral damage, however, will fall on Canada, Mexico, and economies around the world. The question now is: Will Trump back down, or will he raise the stakes even higher? And what about Canada—would they dare cut off all energy supplies to the U.S.? What do you think?
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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