Summary

President Trump’s ‘liberation day’ tariff announcement spared Canada and Mexico from reciprocal tariffs, but saw President Trump escalate the trade war against other countries.

By disrupting the world trade order, the U.S. administration is creating new headwinds for the global economy. This means that Canada, despite a smaller relative hit, is not out of the woods and still faces tariff pressure for autos and steel/aluminum.

Alberta companies will have relatively low exposure to U.S. tariffs as long as they comply with the Canada US Mexico Agreement (CUSMA).* The auto and steel/aluminum tariffs primarily impact Ontario and Quebec, where these goods are predominantly produced. 

If current policy holds, the direct tariff impacts are now smaller than we assumed in our March Alberta economic forecast. But we now turn our attention to increased risks to U.S. and global growth and commodity prices. This would indirectly impact Alberta’s trade exposed economy.  

Until we get more information, we see our forecast from March as a reasonable planning scenario. We will monitor closely and continue to provide updates.

The Details 

Sweeping tariffs were imposed on over 60 ‘worst offender’ countries, ranging from a 10%  base rate to 50%. The tariffs take effect April 5th starting with the base tariffs, escalated to the full tariff rate on April 9. Trump is targeting countries that run large trade deficits with the U.S. 

The emergency conditions cited in the executive order are persistent trade deficits which the order argues  “reflects asymmetries in trade relationships that have contributed to the atrophy of domestic production capacity, especially that of the U.S. manufacturing and defense-industrial base”.

As presented, the counter-tariffs were intended to match tariffs imposed by other countries plus non-tariff barriers. President Trump cited currency manipulation and value added taxes as examples of non-tariff barriers. But it was later revealed that the counter-tariffs simply reflect the size of the U.S. trade deficit with various countries. The calculated amount was divided by half in what Trump characterized as “kind” tariffs (see chart for a partial list).

How long will these measures last?  It’s unclear, though the President indicates that he’s looking for countries to enact changes that contribute to the U.S. trade deficit. According to the executive order: “These additional ad valorem duties shall apply until such time as I determine that the underlying conditions described above are satisfied, resolved, or mitigated.”   

For Canada, no new tariffs were announced and companies can avoid tariffs (outside steel/aluminum and autos) as long as they are compliant with the Canada-U.S.-Mexico trade agreement (CUSMA) - an agreement Trump negotiated in his first term. In particular:

• No new counter-tariffs will be imposed on Canadian goods compliant with the CUSMA agreement.
• Non-compliant products will continue to face a 25% tariff on products, except energy, potash and critical minerals which will be subject to the 10% rate.
• If the fentanyl emergency is canceled, the general tariff rate drops to 12%.
• Canada is still subject to the previously announced 25% tariffs on autos (which take effect today) and steel and aluminum (already in effect).

In response, Prime Minister Mark Carney just announced a new round of counter-tariffs on imports of American-made cars not compliant with CUSMA, excluding auto parts. 

Implications for Alberta’s Economy - Preliminary Assessment

Let's start with the positive. No new tariffs were announced for Canada beyond the previously announced steel/aluminum and auto tariffs. If this holds, we see smaller direct impacts of tariffs than we built into our base case forecast for Alberta.  With other countries now caught in the U.S. tariff cross hairs, Canada’s relative tariff position has improved, making it less likely the U.S. will source products from outside Canada and Mexico to avoid tariffs. 

However, Alberta is not out of the woods. We now see larger indirect effects on Alberta’s economy via weaker global growth, given how broad in scope these tariffs are. Tariffs, and the retaliation that will surely follow, will raise costs creating a ‘stagflation’ type shock. This is an escalation of the global trade war outside Canada/Mexico and countries are developing plans to respond to the measure. 

Market reaction was swift on growth and recession fears. As this Twenty-Four goes to virtual print, the S&P 500 was down 3.7% this morning and TSX down 2.9%. West Texas Intermediate (WTI) oil prices dropped 7.2%, though this also reflects OPEC’s surprise decision to increase production. 

The U.S. economy was already showing signs of strain and consumer confidence has plunged. Now American companies will see higher costs, with the promised benefit (if any) of these protectionist measures taking time to materialize. Prior to yesterday’s announcement, inflation expectations have surged to 5% according to the University of Michigan index, complicating the Federal Reserve’s task of getting inflation back to 2%. 

Finally, there is no end to the uncertainty even after yesterday’s announcement. How long will these tariffs last? Can countries negotiate lower or no tariffs? How will countries retaliate? Will further action be taken towards Canada?

On balance, we think our Alberta economic outlook released last month still provides a reasonable ‘base case’. But it’s still early, and we will watch how markets react and monitor indicators (confidence, employment, and inflation) and further tariff action before making revisions to our forecast scenarios.

*To be in CUSMA compliance, products must meet the rules-of-origin outlined in the trade agreement. The rules of origin specifies what proportion of a good must be sourced in North America. Many companies have not certified their goods as CUSMA compliant as they could still access low ‘most favoured nation’ tariff rates, and it may not have been worth it to undertake the additional compliance costs. But now with these tariffs in place, it is expected that companies will undergo this compliance to shelter them from these tariffs. For an overview, see this informative piece by Mark Rendall with the Globe and Mail. 

Answer to the previous trivia question: Luxembourg has the highest exports per capita (in current U.S. dollars), nearly twice as much as the second highest country i.e. Singapore.

Today’s trivia question: What popular comedy from the 1980s contains the famous scene of a high school teacher talking about the Smoot-Halley Tariff Act to a bored audience?