President-Elect Donald Trump’s Tariff Threat is Too Big to Dismiss

Markets Plus Transcript

Speaker 1:

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Allison Hakomaki:

Greetings everyone. I'm Allison Hakomaki, Head of National Agriculture, Public Sector, and Emerging Industries at BMO Bank of Montreal, Canada. Not even a month after the 2024 US election, President-Elect Trump has threatened and across-the-board 25% tariff on all products from Canada and Mexico effective on day one of his administration. These tariffs, he said, would remain in effect until Canada and Mexico take actions to stop drugs such as fentanyl and illegal aliens from entering the US. This was clearly a violation of the USMCA CUSMA trade agreement that Donald Trump signed himself. But after an initial jolt, the financial markets reflect a somewhat buoyant mood, which would imply many felt this was simply bluster. However, the announcement was provocative and if we learned anything during the last Trump administration, it's that we should expect the unexpected and we need to prepare for anything. Further, the incoming administration will be very different from Trump's last one. Canada itself is very different politically from the last time we negotiated with the US.

If implemented, the tariffs would have far-reaching consequences. The threat itself has many wondering what steps do we need to take to prepare, and that's why we're here today, to share insights from both sides of the border.

I'm very pleased to introduce our esteemed panel today. Steve Verheul is principal at GT & Co and the former Chief Trade Negotiator for Canada. Doug Porter is managing Director and Chief Economist at BMO. Doug will help us understand the economic implications of higher tariffs among the North American trading partners. And Yung-Yu Ma is the Chief Investment Officer for BMO Wealth Management in the US and will share insights on what the tariff threats mean for the markets.

So Steve, I'd like to start with you. Given your decades long experience as Canada's top negotiator, we'd love your insight on what prompted this bold announcement by President-Elect Trump. Can you provide some context as to what led up to this point? What are the implications and how will Canada respond?

Steve Verheul:

Okay. Well, good afternoon everyone, and thank you, Allison. President-Elect Trump has been interested in tariffs for a very long time. In his first term, he used section 232, national security tariffs against Canada, Mexico, and a number of other countries to impose tariffs against imports of steel and aluminum. He used another provision, section 301 of the Trade Act of 1974 to impose tariffs against China. And he also looked at the notion of using the International Emergency Response Act to impose tariffs against Mexico, but never eventually went ahead with that.

So he's a big fan of tariffs. He will continue to be a big fan of tariffs, we expect. And the way he looks at it is basically he sees four kinds of main benefits for tariffs. One is to ensure that he can try to bring production back into the US. In other words, countries or exporters would rather relocate to the US than have to pay the tariffs. So he sees this as a mechanism to bring more production into the US market. He would also like to address trade deficits with tariffs. That's also a major consideration. He'd like to match the trade levels that other countries have because US tariffs tend to be lower than most other countries maintain at the border. So he wants to address that. And then he also wants to see tariffs as a source of revenue. So a lot of those issues are challenging to deal with, but I think President-Elect Trump likes tariffs even more now and is less constrained about using them than he was in the first term.

Fairly recently, he has been talking about across-the-board tariffs of 10% or possibly 15% that would apply against all countries. He's also talked about tariffs of at least 60% against imports from China. So the recent message about looking at 25% tariffs against all imports from all sources from Mexico and Canada is a bit of a new direction. We don't know what that means for the previous commitments on 10% tariffs across the board. That remains to be seen, but we'll see.

If it happens that President-Elect Trump does impose across-the-board tariffs of 25% against all imports from Canada and from Mexico, then clearly, that will be a very significant hit to the economies of Canada and Mexico since both of us rely highly on exports to the US. That's our primary export destination by a very wide margin. And I think clearly, it would have some significant impacts on the US economy as well. Our economies are integrated, as supply chains are closely intertwined, and we would be in for a highly disruptive period of time if such tariffs were to be put in place.

And if President-Elect Trump did impose tariffs against Canada and Mexico at 25%, they would leave Canada and Mexico with worse access to the US market than the 166 members of the WTO. And we would really be in a place where only Russia, North Korea and a handful of other countries would have worse access into the US market than the US's two largest trading partners. So there's a certain aspect of this that seems less than credible, but that doesn't mean we shouldn't be preparing for it. So obviously, we have to do that.

So I think the question now is how will Canada respond? What is the strategy of the government to respond to this? Well, I think we don't have any real choice but to start by addressing the notional rationale for why President-Elect Trump is making these threats and that has to do with fentanyl and illegal migration across the border. Now, those issues, Canada certainly doesn't contribute much to this problem. Mexico contributes much, much more. We're a fraction, maybe 2% of the issue that is related to this. And it also goes against traditional approaches that would say that the country of import is the one that is responsible for maintaining its borders. But clearly, we're not in that kind of world when we get these kinds of messages from President-Elect Trump, but we have no choice but to try to address the rationale that he has put out for making a threat.

So the other part of the Canadian strategy is to try to establish relationships with the new team coming in. The Prime Minister's visit to Mar-a-Lago last week was an effort to do that. It did go ways in establishing relationships. It's always easier to pick up the phone and talk about something if you've had some kind of interaction with your counterpart initially. So that was, overall, a positive move.

Another part of the strategy is to mobilize the private sector in the US to oppose these tariffs and make that opposition known to the US administration. And certainly, we've seen comments from Walmart, a number of other companies about how this would raise the price of goods considerably.

The Canadian government is also preparing for the possibility that this could all go very badly. So that means looking at retaliation, imposing tariffs against imports from the US. The government is also looking at the potential of using export taxes as an additional means to put pressure on, as well as suspending some elements of the agreement we have with the US and Mexico, the CUSMA. All of those are on the table at the moment. But part of the problem with retaliation is the scale, because a 25% tariff across $500 billion roughly of exports from Canada is a big number and we would have to retaliate from Canada at very high levels in order to match that, and that is always a challenge.

So we're in a very uncertain period right now. There will be an effort between now and when President-Elect Trump takes office on January 20th to try to dissuade them from going in this direction. But if they do, then Canada will be prepared to take actions immediately and send the message that this is an unacceptable step-up, particularly for his two largest trading partners.

Allison Hakomaki:

Great. Thanks so much for that insight, Steve. Doug, I'd love to turn it over to you. Can you just frame things at the top by explaining what the motivation and what impact tariffs would have on US and Canadian economies?

Doug Porter:

Sure thing, and good afternoon everyone. Thanks. Thanks, Allison. So I'd start off by saying that first of all, very big picture, the financial markets simply do not believe that this is going to come to pass. I think that's quite clear. For instance, if you look at the Mexican peso or even the Canadian dollar, there are very little change from pre-threat levels. And up until recently, the Toronto Stock Exchange had actually managed to reach an all-time high. So I think from a very big picture view, the financial markets simply do not believe this is going to come to pass. I suspect that that calm is highly questionable. I think we should take the threat seriously or at the very least, prepare and consider what broad-based tariffs could mean for the economy.

In terms of motivation, I think Steve laid it out very well. I think simply put, the President-Elect believes that tariffs are essentially a one-way street, that the US economy pays very little price and essentially the company that's doing the exporting to the US ultimately bears the bulk of the cost. We can debate whether that's a correct assumption or not. I think there is some truth to that in some goods. But at the very least, for the US economy, I think when you throw sand into the gears of trade, especially with your two biggest trading partners, it does tend to have, at the margin, a stagflationary impact.

So in other words, it will put some upward pressure on inflation at the very least. Some have suggested it could raise inflation by as much as 1%, if we saw that extent of tariffs in the US. And if you are damaging your two largest export markets, that can come back on your economy and hurt growth. However, there is no sugarcoating it, it is a much bigger negative potentially for the Mexican and the Canadian economy. In both cases, we export roughly, or I should say three quarters of our exports go to the US, and in both cases, exports account for roughly a quarter of GDP, so the arithmetic tells us that exports to the US are almost 20% of GDP for both economies.

The Canadian Chamber of Commerce has come out with an estimate that suggests that just as a standalone measure without retaliation, a 25% tariff would carve about two percentage points off of Canadian GDP in the first year. That's just the first round effects, that doesn't even get into the chill that it would put into business investment. And that doesn't assume retaliation. If we get anything close to the kind of retaliation that Steve was talking about, you could see a cut in Canadian GDP of upwards of 3%.

Now, I will say above and beyond whatever the response is on the political side, there would be monetary and fiscal policy response, heavy duty response. I think what we're talking about in the event of a broad-based tariff like that would be much deeper interest rate cuts by the Bank of Canada to support the economy. So for instance, to put some numbers around that, we've been assuming that the Bank of Canada would take interest rates down to about two and a half percent for their overnight rate from three and three quarters at the moment. I could see another, at least one percentage point cut above and beyond that. So we'd be talking about a one and a half percent overnight rate in the event of the extreme event of broad-based tariffs.

I could also see a fiscal response. In that world, I think the government would be quite reasonable to provides all kinds of support to basically boost the parts of the economy that they could control. I think we'd be talking, roughly speaking, on the order of about a half percent of GDP of fiscal support. And I think all of those things, along with some depreciation in the Canadian dollar, could limit the damage to some extent. Our best guess is that it would lead to about a 1% decline in GDP in the first year. But again, those are just the first round direct impacts and it would also skew growth more towards the domestic side. So in other words, there'd be much more emphasis on consumer spending and housing, with obviously a much weaker environment for exports and business investment. Not a great outcome for the Canadian economy at all.

Allison Hakomaki:

That is great insight. Thank you very much, Doug. Yung-Yu, I'd love to turn it over to you as our representative from the US. I know you've been following this really closely. So just to get sort of your opening thoughts as it pertains to the current threatened tariffs and even as a precursor to a renegotiation of the USMCA that Trump likely has in store. So would you like to open up with some thoughts for us please?

Yung-Yu Ma:

Yes, thank you, Alison, and good afternoon everyone. I do think it is important to think about and understand well the context both of which President Trump thinks about tariffs and trade and also the people he's putting in place or he plans to put in place, such as US Trade Representative Jamieson Greer, Tom Homan, the border czar, what they've been talking about as well.

But first, President Trump in terms of his approach to tariffs and how he views these, one big part of that is to enact domestic policy goals. It's not purely about economics, eliminating deadweight costs like we learn in economics 101. It's really about affecting and enacting the programs and policies that the president believes are important. So one of those is, as was mentioned, bringing back manufacturing to the US. I do believe that President Trump is very serious about that topic in particular, but there's also a broad range, as we see now, of geopolitical goals, topics, leverage that the president might want to impose on other countries. In this case, the topic under discussion for these threatened tariffs is control the border or better oversight of the border. And we'll talk about what this context means for how we think the likely outcome is going to be.

But part of that is also why we think Trump 2.0 is very different and meaningfully different than Trump 1.0. In Trump's first administration, first term, he was an outsider, not just a political outsider, but he was a Republican outsider. He didn't have a lot of buy-in from even his own party. Right now, he has a very firm control of the Republican Party. So some of the opposition that might've stood in the way of tariffs, for example, which has not been part of the Republican platform historically, a lot of that is much weaker today than it was eight years ago.

Another point which is worth understanding is that President Trump did win the election in what is somewhat of a landslide. He won every single swing state. He won the popular vote, which no Republican president has done in 20 years. And it is something where he believes he has a mandate to enact some of the changes that he's been talking about on the campaign trail.

Beyond that, the courts are very much stacked or at least tilting in the favor of the president, so there's not going to be a lot of pushback if the president invokes national security grounds or emergency powers relating to tariff imposition. So there's not a lot of these checks and balances the way there may have been eight years ago, which is, to Steve and Allison, your comment as well, these are going to be less constrained or less constraints on the president than there were eight years ago.

And it's also the case eight years ago, President Trump was focusing on tax cuts. As we know, once he got in office, that was the big signature policy, was cutting taxes. Tariffs on China only came later after that tax cut package was a done deal. In this round, tax cuts are going to play a much smaller role because given the budget situation in the US, there's just not a lot of room for substantial tax cuts beyond extending the tax cuts that were enacted in 2017. So really, tariffs and trade and this idea of trying to bring back manufacturing are really going to be front and center in the government's policies.

And if you listen to who is to be appointed as US trade representative, Jamieson Greer, one thing he points to is the administration now has data and what they believe from President Trump's first term was that there weren't all these negative effects of tariffs that were predicted or talked about. So they seem more emboldened this time around in terms of using tariffs more aggressively than in the previous term.

So what does that mean? Well, it does mean, I think in this instance, when we're talking about border security in particular, Tom Homan, the to-be-appointed border czar has talked about its crisis at the border. Yes, it is something that Canada is probably going to, in order to appease some of the US, President Trump's insistences on this point, make some efforts with. But it's also something to think about these threatened tariffs in the context of renegotiation of USMCA. That's definitely something that is on the docket for the Trump administration prior to 2026. And it's something where President Trump is likely thinking about this in somewhat of a repeated game type of game theory mentality and how this plays out.

We do think that, as Steve mentioned, the 25% tariffs are not credible and that's not something we would expect even to remotely come to pass across the board. We think the question is whether or not President Trump puts some tariffs on certain industries, certain goods, and leaves those there as sort of a negotiating chip for USMCA in later rounds, as something that he can sort of put out there as bringing off the table and putting those tariffs on to begin with in the earlier days of the administration.

So we do think that there's this dynamic in play. It's a little bit difficult to predict, even if we don't get the 25% tariffs, that there could be some targeted tariffs that take place. But Canada has a nice position in terms of the one thing it has is what I would say a special relationship with President Trump. And it's not the way that we think about a special relationship here in the US, where I think about a special relationship with Canada, our neighbors, our colleagues, our friends. For President Trump, it's about oil and Canada exports a lot of oil to the US. And that is very central to President Trump's initiatives and it's going to become more central later, after President Trump takes office because he's going to want to turn the screws on Iran and that's going to very likely to bring oil off the market and that Canadian oil's very important.

So I do think there's a path to all sides coming together on this with minimal effect, but it's going to be a very bumpy process. And President Trump is definitely more emboldened with tariffs this time around than he was in 2017, 2018.

Allison Hakomaki:

Thanks so much, Yung-Yu. Steve, I'd like to turn it back to you. There's been some talk about retaliatory efforts on the part of Canada, and so I'm hoping you could talk to us a little bit about how Canada responded during the steel and aluminum tariffs several years ago. What did they learn and how would they be approaching at this time?

Steve Verheul:

Well, whenever the government initiates some kind of retaliatory response, there's a basic kind of formula that's followed. First of all, you try to avoid putting any kind of inputs on the list, inputs to further manufacturing, for example. You try to avoid capturing products that aren't produced in Canada or substitutes are not readily available from other sources, including other trading partners. Those tend to be put off the table. And you focus on areas where you try to cause the maximum damage or irritation in the US market.

So last time around with steel aluminum, we covered steel aluminum for one thing, as a response. We also tried to target products that would be sensitive in particular regions, political regions in the US. So we went after washers and dryers and fridges, those kinds of things. We went after certain types of luxury products like boats and yachts and those kinds of things, although we got a lot of complaints back when we put those on. But it's really trying to target specific regions of senators or influential people and try to hit them there, which is why we went after certain types of whiskies as well. So it's all based on an attempt to try to cause the maximum negative reaction in the US.

Now, when we're talking retaliatory tariffs, the US is looking at doing this across the board, applying tariffs to everything, including products they need, like oil, including products they don't produce, which doesn't make a lot of sense either. But Canada's response is most likely to be more targeted. Won't cover issues like that where we need the products, like their inputs, as I said, or we don't have any other sources, and we will focus in on those products that we think could do the most damage in terms of impacting the US.

Allison Hakomaki:

Thanks very much. And another question on everyone's mind, Doug, is how are these threats impacting the foreign exchange? And then what do we view as the outlook as we approach 2025?

Doug Porter:

So it's interesting, almost the moment that the post went out last Monday, the first reaction right across the board was a very sharp weakening in the Canadian dollar and the Mexican peso, and I do think that was the right response. Ultimately, this is how the threat of tariffs can be partially countered or blunted is through an appreciation of the US dollar or a depreciation in the targeted countries. It certainly will not be enough. No one wants to see a 25% depreciation in the peso or the Canadian dollar.

But given the kind of landscape I was talking about before, some of the monetary and fiscal policy responses we could see, if we were really facing across-the-board tariff of something on the order of 25%, I think a depreciation of the Canadian dollar of five to 10% from current levels would be within reason. It's entirely conceivable. And we've been there before, by the way. It's not recently, but we have been to around the 1.50 mark or 66 cents. And if the end result is a much more limited tariff, say 10% across the board or 20% on certain items rather than on all products, then, of course, the currency response and the macro response would be much more limited. But I do think the direction is right. Insofar as we do face pressure from certainly our largest export market and the threat of tariffs and a weaker investment climate, I think the right response is a weaker currency.

Now, before all of this, we had been assuming that the underlying domestic economy was actually starting to turn, and there's been a number of indications that the Canadian consumers getting off of the map. We're seeing things like housing and auto sales really beginning to stir again in Canada. Even the relatively soft GDP report last week, we did see some strength in consumer spending. So we actually believe the economy was moving to a better space next year and that the Canadian dollar might actually begin to appreciate somewhat. But of course, this entire tariff threat has just knocked that off the board. And I think that the currency will really struggle. Even if the tariffs are not applied, I think the currency will struggle to appreciate next year.

Allison Hakomaki:

Thank you. Yes, I know just from the line speaking with a lot of our commercial customers, a lot are reaching out to our foreign exchange experts to talk about their hedging strategies. So there's definitely a lot of interest on how we can protect ourselves during this period of uncertainty and volatility.

Yung-Yu, I'd love to probe a little bit more about how you're viewing the markets overall. So beyond the tariffs, how do you feel that President-Elect Trump's presidency could have broader implications on the markets going ahead and how are you viewing this?

Yung-Yu Ma:

Yeah, that's a great question. We do think tariffs pose a real risk, both in terms of disruptions to trade, potential inflationary impacts, what the Fed is going to do. How much latitude the Fed actually will have to cut rates in 2025 is probably relatively modest because of some of these concerns.

There is strength, there is underlying strength in the US economy. We know that's the case. We think that's going to continue, productivity is going to continue to be strong. And that actually plays into President Trump's hands in terms of when he's looking at what he can do with tariffs. And again, there's a nice 45-minute interview with Jamieson Greer where he talks about this, who's going to be the US trade representative under President Trump and talks about that, yes, this could be disruptive to markets. They can accept that in the short term, but they think there are going to be other tailwinds to markets such as they come from deregulation, they come from lower oil prices, they come from a strong economy that gives them some latitude to make these tariff moves to try to enact or push forward the policies that the administration wants to push forward.

So yes, the US economy, we think, is going to continue to remain strong that the markets, even though there's likely to be more volatility in 2025 than there was in 2024, more bumps along the way, that it's still a favorable trajectory. But that said, the administration's also looking at those favorable dynamics and thinking that that gives them more cushion to take some more aggressive actions in this regard.

Allison Hakomaki:

Thanks so much. Well, there is a lot for businesses, consumers to be thinking about. I would love to have some of your closing thoughts. And Steve, you've been in the thick of it, so what do you think? Where do we go from here? And what are you going to be watching for in the near term?

Steve Verheul:

Well, I'll be watching for how quickly the US moves because I think if tariffs are put in place initially, as he's threatened, on January 20th, then there will be a bit of a scramble to try to find a way to deal with that. I think it won't take long to try to steer this into an actual negotiation. We have a review of the agreement coming up in 2026, but that's kind of the end point. 2025 is really going to be the negotiating period, so I think there's a good chance that all of these tariff discussions will start to evolve into a renegotiation of the agreement and we would attempt to address some of those issues within that negotiation. So hopefully short term, but it's going to be a rocky period and a lot of chaos in the market.

Allison Hakomaki:

Thanks. Yung-Yu, what are your final thoughts? What are you going to be watching for?

Yung-Yu Ma:

Right, in terms of this specific issue, really watching to see what some of the news flow is and statements that are made specifically about some of the border security that the Trump administration is requesting or the incoming Trump administration is requesting be strengthened, and then President Trump's response to that. And Tom Homan, the soon to be appointed border czar, his response to that as well. I think that's going to give us a lot of direction on what's going to be happening on day one in terms of these potential tariff threats.

But my suspicion is there'll be enough action that this concern will be largely alleviated by Inauguration Day, which is January 20th. But it may not be completely alleviated and there still could be lingering issues or potential for President Trump to say, "Let's wait to see that these talked about measures are actually enacted and that are bearing fruit and seeing results," and putting on some nominal amount of tariffs until he's satisfied that those results are seen. So I think what comes out of both the Canadian side and the US side is going to be a very impactful in the coming weeks.

Allison Hakomaki:

Thank you. And over to you, Doug, for your final thoughts about where do we go from here? And what are you going to be watching?

Doug Porter:

Well, I think if we pull all the threads together from what we've just heard, I think the main message is even if this threat does tend to pass, the reality is we're dealing with an overtly protectionist president who is very fond of using tariffs, who will continue to threaten some major trading partners, even friendly trading partners with the potential of tariffs. I think we are going to be living with much more trade uncertainty than what we're dealing with, arguably even more so than in the first Trump administration.

And unfortunately, I think what that means is ultimately, we are likely looking at a chill in business investment in Canada, especially investment aimed at exports. And it ultimately means that that will have to be compensated somewhat at the marginal lower interest rates and a weaker exchange rate than would otherwise be the case to support growth in other areas. And we're probably going to end up with a little bit more of a tilt to consumer spending and housing, and as I said earlier, less on exports and business investment. And it's a challenge, no question, for the Canadian economy.

Allison Hakomaki:

Well, given that, I would encourage all of our customers, be it commercial or consumer, reach out to your BMO experts, we're here to help navigate through this uncertainty. We've covered a lot of ground exploring the implication of these tariffs and what they could mean to business and consumers. And I just want to sincerely thank Steve, Doug, and Yung-Yu. Your insights have been very much appreciated and valued. Thanks to everybody and I hope you have a great rest of your day.

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Video Transcript

The Trump Tariff Threat

December 4, 2024
3:30 p.m. EST

Allison Hakomaki:    Greetings, everyone. I'm Allison Hakomaki, head of National Agriculture, Public Sector and Emerging Industries at BMO Bank of Montreal, Canada. Not even a month after the 2024 US election, President-elect Trump has threatened an across-the-board 25% tariff on all products from Canada and Mexico, effective on day one of his administration. These tariffs, he said, would remain in effect until Canada and Mexico take actions to stop drugs such as fentanyl and illegal aliens from entering the US. This was clearly a violation of the USMCA CUSMA trade agreement that Donald Trump signed himself. But after an initial jolt, the financial markets reflect a somewhat buoyant mood, which would imply many felt this was simply bluster. However, the announcement was provocative, and if we learned anything during the last Trump administration it’s that we should expect the unexpected and we need to prepare for anything. Further, the incoming administration will be very different from Trump's last one. Canada itself is very different politically from the last time we negotiated with the US. If implemented, the tariffs would be far- would have far-reaching consequences. The threat itself has many wondering what steps do we need to take to prepare? And that's why we're here today, to share insights from both sides of the border.

I'm very pleased to introduce our esteemed panel today. Steve Verheul is principal at GT & Co and the former chief trade negotiator for Canada. Doug Porter is managing director and chief economist at BMO. Doug will help us understand the economic implications of higher tariffs, among the North American trading partners. And Yung-Yu Ma is the chief investment officer for BMO Wealth Management in the US, and will share insights on what the tariff threats mean for the markets.

So, Steve, I'd like to start with you. Given your decades-long experience as Canada's top negotiator, we'd love your insight on what prompted this bold announcement by President-elect Trump. Can you provide some context as to what led up to this point? What are the implications, and how will Canada respond? 

Steve Verheul:    Okay. Well, good afternoon, everyone, and thank you, Allison. President-elect Trump has been interested in tariffs for a very long time. In his first term, he used Section 232 national security tariffs against Canada, Mexico and a number of other countries to impose tariffs on imports of steel and aluminum. He used another provision, Section 301 to- of the Trade Act of 1974 to impose tariffs against China, and he also looked at the notion of using the International Emergency Response Act to impose tariffs against Mexico, but never eventually went ahead with that. So he is a big fan of tariffs. He will continue to be a big fan of tariffs, we expect, and the way he looks at it is basically he sees four kinds of main benefits for tariffs.

One is to ensure that he can try to bring production back into the US. In other words, countries or exporters would rather pay- or would rather relocate to the US than have to pay the tariffs. So he sees this as a mechanism to bring more production into the US market. He would also like to address trade deficits with tariffs. That's also a major consideration. He would like to match the trade levels that other countries have because US tariffs tend to be lower than most other countries maintain at the border. So he wants to address that. And then he also wants to see tariffs as a source of revenue. So, a lot of those issues are challenging to deal with. But I think President-elect Trump likes tariffs even more now and is less constrained about using them than he was in the first term. Fairly recently, he has been talking about across-the-board tariffs of 10% or possibly 15% that would apply against all countries. He's also talked about tariffs of at least 60% against imports from China. So, the recent message about looking at 25% tariffs against imports, all the imports from all sources, from Mexico and Canada, is a bit of a new direction. We don't know what that means for the previous commitments on 10% tariffs across the board. That remains to be seen, but we'll see. If it happens that President-elect Trump does impose across-the-board tariffs of 25% against all the imports from Canada and from Mexico, then clearly that will be a very significant hit to the economies of Canada and Mexico, since both of us rely highly on exports to the U.S.. That's our primary export destination by a very wide margin. And I think clearly it would have some significant impacts on the US economy as well. Our economies are integrated, supply chains are closely intertwined, and we would be in for a highly disruptive period of time if such tariffs were to be put in place. And if President-elect Trump did impose tariffs against Canada and Mexico of 25%, it would leave Canada and Mexico with worse access to the U.S. market than the 166 members of the WTO, and we would really be in a place where only Russia, North Korea, and a handful of other countries would have worse access into the US market than the US's two largest trading partners. So there's a certain aspect of this that seems less than credible, but that doesn't mean we shouldn't be preparing for it. So obviously we have to do that.

So, I think the question now is how will Canada respond? What is the strategy of the government to respond to this? Well, I think we don't have any real choice but to start by addressing the notional rationale for why President-elect Trump is making these threats, and that has to do with fentanyl and illegal- illegal migration across the border. Now, those issues, Canada certainly doesn't contribute much to this problem; Mexico contributes much, much more. We're a fraction, maybe 2%, of the issue that is related to this. And it also goes against the traditional approaches that would say that the country of import is the one that is responsible for maintaining its borders. But clearly, we're not in that kind of world when we get these kinds of messages from President-elect Trump. But we have no choice but to try to address the rationale that he has put out for making this threat.

So, the other part of the Canadian strategy is to try to establish relationships with the new team coming in. The prime minister's visit to Mar a Lago last week was an effort to do that. It did go a ways in establishing relationships. It's always easier to pick up the phone and talk about something if you've if you've had some kind of interaction with your counterpart initially. So that was overall a positive move.

Another part of the strategy is to mobilize the private sector in the U.S. to oppose these tariffs and make that opposition known to the U.S. administration. And certainly we've seen comments from Wal-Mart, a number of other companies, about how this would raise the price of goods considerably. Now, the Canadian government is also preparing for the possibility that this could all go very badly. So that means looking at retaliation, imposing tariffs against imports from the U.S. The government is also looking at the potential of using export taxes as an additional means to put pressure on, as well as suspending some elements of the agreement we have with the U.S. and Mexico, the CUSMA. All of those are on the table at the moment. But part of the problem with retaliation is the scale because a 25% tariff across $500 billion roughly of exports from Canada is a big number, and we would have to retaliate from Canada at very high levels in order to match that, and that is always a challenge. So we're in a very uncertain period right now. There will be an effort between now and when President-elect Trump takes office on January 20th to try to dissuade them from going in this direction. But if they do, then Canada will be prepared to take actions immediately and send the message that this is an unacceptable step, particularly for his two largest trading partners. 

Allison Hakomaki:     Right. Thanks so much for that insight, Steve. Doug, I’d love to turn it over to you. Can you just frame things at the top by explaining what the motivation and what impact tariffs would have on the US and Canadian economies? 

Doug Porter:    Sure thing. And good afternoon, everyone. Thanks. Thanks, Allison. So I'd start off by saying that, first of all, very big picture, the financial markets simply do not believe that this is going to come to pass. I think that's quite clear. For instance, if you look at the Mexican peso or even the Canadian dollar, they're very little change from pre-threat levels. And up until recently, the Toronto Stock Exchange had actually managed to reach an all-time high. So, you know, I think from a very big picture view, the financial markets simply do not believe this is going to come to pass. I suspect that that calm is highly questionable. I think we should take the threat seriously or at the very least, prepare and consider what broad-based tariffs could mean for the economy.

In terms of motivation, I think Steve laid it out very well. I think, simply put, the president-elect believes that tariffs are essentially a one way street, that the US economy pays very little price, and essentially the, you know, the company that's doing the export- exporting to the US ultimately bears the bulk of the cost. We can debate whether that's a correct assumption or not. I think there is some truth to that in some goods. But at the very least for the US economy, I think when you throw sand into the gears of trade, especially with your two biggest trading partners, it does tend to have, at the margin, a stagflationary impact. So in other words, it will put some upward pressure on inflation, at the very least. Some have suggested it could raise inflation by as much as 1% if we saw that extent of tariffs in the U.S. And if you are damaging your two largest export markets, that can come back on your economy and hurt growth. However, there is no sugarcoating it.  It is a much bigger negative potentially for the Mexican and the Canadian economy. In both cases, we export roughly, I should say, three quarters of our exports go to the US. And in both cases, exports account for roughly a quarter of GDP. So, the arithmetic tells us that exports to the U.S. are almost 20% of GDP for both economies. The Canadian Chamber of Commerce has come out with an estimate that suggests that just as a stand alone measure without retaliation, a 25% tariff would carve about two percentage points off of Canadian GDP in the first year. That's just the first-round effects. That doesn't even get into the chill that it would put into business investment. And that doesn't assume retaliation. If we get anything close to the kind of retaliation that Steve was talking about, you could see a cut in Canadian GDP of upwards of 3%. Now, I will say above and beyond, whatever the you know, the response is on the political side, there would be monetary and fiscal policy response, a heavy duty response. I think what we're talking about in the event of a broad-based tariff like that would be much deeper interest rate cuts by the Bank of Canada to support the economy.

So, for instance, to put some numbers around that, we've been assuming that the Bank of Canada would take interest rates down to about 2.5% for their overnight rate from three and three quarters at the moment. I could see another at least one percentage point cut above and beyond that. So we'd be talking about about a 1.5% overnight rate in the event of a of the extreme event of broad-based tariffs. I could also see a fiscal response. In that world, I think the government would be, you know, it'd be quite reasonable to provide all kinds of support to, you know, to basically boost the parts of the economy that they could control. I think we'd be talking, you know, roughly speaking, on the order of about a half percent of GDP of fiscal support. And I think all of those things, along with some depreciation in the Canadian dollar, could limit the damage to some extent. Our best guess is that it would lead to about a 1% decline in GDP in the first year. But again, those are just the first-round direct impacts and it would also skew growth more towards the domestic side. So in other words, there would be much more emphasis on consumer spending and housing, with obviously a much weaker environment for exports and business investment. Not a great outcome for the Canadian economy at all. 

Allison Hakomaki:     Well, that is great insight. Thank you very much, Doug.

Yung-Yu, I'd love to turn it over to you as our representative from the U.S. I know you've been following this really closely. So just to get sort of your opening thoughts, you know, as it pertains to the current threatened tariffs and even as a precursor to a renegotiation of the USMCA that Trump likely has in store. So, would you like to open up to some thoughts for us, please? 

Yung-Yu Ma:    Yes. Thank you, Allison, and good afternoon, everyone. I do think it is important to think about and understand well the context, both of which President Trump thinks about tariffs and trade and also the people he's putting in place, or he plans to put in place, such as U.S. Trade Representative Jamison Greer, Tom Homan, the boarder czar,  what they've been talking about as well.

But first, President Trump, in terms of his approach to tariffs and how we how he views these, one big part of that is to enact domestic policy goals. It's not purely about economics, eliminating deadweight costs like we learn in economics 101. It's really about effecting and enacting the programs and policies that the President believes are important. So, one of those is, as was mentioned, bringing back manufacturing to the U.S. I do believe that President Trump is very serious about that topic in particular. But there's also a broad range, as we see now, geopolitical goals, topics, leverage that the president might want to impose on other countries. In this case, the topic of- under discussion for these threatened tariffs is control the border, better oversight of the border. And we'll talk about what this context means for how we think the likely outcome is going to be. But part of that is also why we think Trump 2.0 is very different and meaningfully different than Trump 1.0.

In Trump's first administration, first term, he was he was an outsider, not just a political outsider, but he was a Republican outsider. He didn't have a lot of buy-in from even his own party. Right now, he has a very firm control of the Republican Party. So some of the opposition that might have stood in the way of tariffs, for example, which has not been part of the Republican platform historically, a lot of that is much weaker today than it was eight years ago.

Another point which is worth understanding is that President Trump did win the election in what is somewhat of a landslide. He won every single swing state. He won the popular vote, which no Republican president has done in 20 years. And it is something where he believes he has a mandate to enact some of the changes that he's been talking about on the campaign trail. Beyond that, the courts are very much stacked, or at least tilting, in the favor of the president. So there's not going to be a lot of pushback if the president invokes national security grounds or emergency powers relating to tariff imposition. So there's not a lot of these checks and balances the way there may have been eight years ago, which is to Steve and Allison, your comments as well, these are going to be less constrained- there are less constraints on the president than there were eight years ago. And it's also the case eight years ago, President Trump was focusing on tax cuts. As we know, once he got in office, that was the big signature policy was cutting taxes. Tariffs on China only came later, after that tax cut package was a done deal. In this round, tax cuts are going to play a much smaller role because given the budget situation in the U.S., there's just not a lot of room for substantial tax cuts beyond extending the tax cuts that were enacted in 2017.

So, really tariffs and trade and trying to- this idea of trying to bring back manufacturing are really going to be front and center in the government's policies, and if you listen to the Who is to be appointed as U.S. Trade representative Jamison Greer, one thing he points to is the administration now has data and what they believe from the first round, President Trump's first term, was that there weren't all these negative effects of tariffs that were predicted or talked about. So they seem more emboldened this time around in terms of using tariffs more aggressively than in the previous term.

So, what does that mean? Well, it does mean, I think, in this instance when we're talking about border security in particular, Tom Homan, the appointed or to be appointed a border czar is talking about, it's a crisis at the border. Yes, it is something that Canada is probably going to, in order to appease some of the U.S. President Trump's insistences on this point, make some efforts with. But it's also something to think about these are threatened tariffs in the context of renegotiation of USMCA. And that's definitely something that is on the docket for the Trump administration. You know, prior to 2026, and it's something where President Trump is likely thinking about this in somewhat of a repeated game, type of game theory mentality, and how this plays out, we do think that, as Steve mentioned, the 25% tariffs are not credible and that's not something we would expect even to remotely come to pass across the board. The question is whether or not- we think the question is whether or not President Trump leaves or puts some tariffs on certain industries, certain goods and leaves those there as sort of a negotiating chip for USMCA in later rounds and something that he can sort of put out there is bringing off the table and putting those tariffs on to begin with in the- in the earlier days the administration. So we do think that there's this dynamic in play. It's a little bit difficult to predict, even if we don't get the 25% tariffs, that there could be some targeted tariffs that take place. But Canada has a nice position in terms of the one thing it has is what I would say a special relationship with President Trump, and it's not the way that we think about a special relationship here in the U.S., or I think about a special relationship with Canada, our neighbors, our colleagues, our friends. For President Trump, it's about oil. And Canada exports a lot of oil to the U.S. and that is very central to President Trump's initiatives, and it's going to become more central later after President Trump takes office because he's going to want to turn the screws on Iran. And that's going to bring- very likely to bring oil off the market. And that Canadian oil is very important. So I do think there's a path to all sides coming together on this with minimal effect, but it's going to be a very bumpy process and President Trump is definitely more emboldened with terrorists this time around than he was in 2017, 2018. 

Allison Hakomaki:     Thanks. Thanks so much, Yung-Yu. Steve, I'd like to turn it back to you. You know, there's been some talk about retaliatory efforts on the part of Canada, and so I'm hoping you could talk to us a little bit about how Canada responded during the steel and aluminum tariffs several years ago. What did they learn and how would they be approaching that this time? 

Steve Verheul:    Well, whenever the government initiates some kind of retaliatory response, there's a basic kind of formula that's followed. First of all, you try to avoid putting any kind of inputs on the list, inputs to further manufacturing, for example. You try to avoid capturing products that aren't produced in Canada or are or substitutes are not readily available from other sources, including other trading partners. Those tend to be put off the table, and you focus on areas where you try to cause the maximum damage or irritation in the U.S. market. So last time around was steel and aluminum. We covered steel and aluminum for one thing, as a response. We also tried to target products that would be sensitive in particular regions, political regions, in the U.S.. So we went after washers and dryers and fridges, those kinds of things. We went after certain types of luxury products, like boats and yachts and those kinds of things. So although we got a lot of complaints back when we put those on, but what it's really trying to target specific regions of senators or influential people and try to hit them there, which is why we went after certain types of whiskeys as well. So it's all based on an attempt to try to cause the maximum negative reaction in the U.S.

Now, when we're talking retaliatory tariffs, the U.S. is looking at doing this across the board, applying tariffs to everything, including products they need, like oil, including products they don't produce, which doesn't make a lot of sense either. But Canada's response is most likely to be more targeted. It won't cover issues like that, where we need the products like their inputs, as I said, or we don't have any other sources and we will focus in on those products that we think could do the most damage in terms of impacting the U.S. 

Allison Hakomaki:     Thanks very much. And another question on everyone's mind, Doug, is how are these threats impacting the foreign exchange? And then what do we view as the outlook, as we approach 2025? 

Doug Porter:     So it's interesting, the almost the moment that the post went out last Monday, the first reaction rate across the board was a very sharp weakening in the Canadian dollar and the Mexican peso. And I do think that was the right response. Ultimately this- this is how the threat of tariffs can be partially countered or blunted, is through an appreciation of the U.S. dollar or a depreciation of the targeted countries. It certainly will not be enough. You know, no one wants to see a 25% depreciation in the peso or the Canadian dollar. But, you know, given the kind of landscape I was talking about before, some of the monetary and fiscal policy responses we could see, if we were really facing across-the-board tariff of something on the order of 25%, I think that depreciation of the Canadian dollar or 5% to 10% from current levels would be within reason. It's entirely conceivable, and we've been there before, by the way, it's not recently, but we have been to around the 1.50 mark or $0.66. And if, you know, if the end result is a much more limited tariff, say 10% across the board or, you know, 20% on certain items rather than on all products, then of course the currency response and the macro response would be much more limited. But I do think the direction is right. You know, insofar as we do face pressure from our certainly our largest export market and, you know, the threat of tariffs and weaker, you know, weaker investment climate, I think the right response is, is a weaker currency. Now, before all of this, we had been assuming that the underlying domestic economy was actually starting to turn. And there's been a number of indications that the Canadian consumer is getting off the mat. We're seeing, you know, things like housing and auto sales really beginning to stir again in Canada. Even the relatively soft GDP report last week, we did see some strength in consumer spending. So we actually believe the economy was moving to a better space next year and that the Canadian dollar might actually begin to appreciate somewhat. But of course, this entire tariff threat has just knocked that off the board. And I think that, you know, the currency will really struggle if even if tariffs, even if the tariffs are not applied, I think the currency will struggle to appreciate next year. 

Allison Hakomaki:     Thank you. Yes, I know, just from the line, speaking with a lot of our commercial customers, a lot are reaching out to our foreign exchange experts to talk about their hedging strategies. And so there's definitely a lot of interest on how we can protect ourselves during this period of uncertainty and volatility. Yung-Yu, I'd love to probe a little bit more about how you're viewing the markets overall. So, beyond the tariffs, you know, how do you feel that Trump’s presidency- sorry, President-elect Trump's presidency could have broader implications on the markets going ahead, and what- how are you viewing this? 

Yung-Yu Ma:     Yeah, that's a great question. We do think tariffs pose a real risk both in terms of disruptions to trade, potential inflationary impacts, what the Fed is going to do, how much- how much latitude the Fed actually will have to cut rates in 2025 is probably relatively modest because of some of these concerns. But you know what? There is strength. There is underlying strength in the US economy. We know that's the case. We think that's going to continue. Productivity is going to continue to be strong and that actually plays into President Trump's hands in terms of when he's looking at what he can do with tariffs. And again, there's a nice 45-minute interview with Jamieson Greer where he talks about this, who's going to be the US trade representative under President Trump and talks about that, yes, this could be disruptive to markets. They can accept that in the short term, but they think they're going to be other tailwinds to markets such as they come from, deregulation, they come from lower oil prices, they come from a strong economy, that gives them some latitude to make these tariff moves to try to enact or push forward the policies that the administration wants to push forward. So, yes, the US economy, we think, is going to continue to remain strong, that the markets, even though there's likely to be more volatility in 2025 than there was in 2024, more bumps along the way, that it's still a favorable trajectory. But that said, the administration is also looking at those favorable dynamics and thinking that that gives them more cushion to take some- more aggressive actions in this regard. 

Allison Hakomaki:     Thanks very much. Love to, you know, we had more than 100 questions come in during registration, and so we've been trying to cover a lot of them as they relate to tariffs. But I'm also going to try to parse together some themes that we saw as well. And so, Steve, I'd love to turn it to you. I'd love to hear your thoughts with regards to Mexico. Some were quick to say Canada should just negotiate bilaterally with the U.S. But if I'm not mistaken, Mexico was there for Canada in the last round of negotiations, I believe so. Is Canada best served to work with Mexico? Go it alone? What are your thoughts about that, please? 

Steve Verheul:     Well, I think certainly based on the last experience, we need Mexico at the table with us, with the US. In the last negotiation, we pushed back against very extreme proposals from the US that would have caused us both considerable difficulty in Mexico, account to work together to push back on those successfully. So we need Mexico at the table, and it's not just from the perspective of helping us out, but always better to have a somewhat weaker partner at the table if we're dealing with the U.S., because most of the pressure in the upcoming negotiation will be on Mexico rather than Canada. And that puts us in a safer and better spot. And I think that that is our best negotiating posture going forward. But we also need to keep in mind that from an economic perspective, Mexico is a significant part of the North American economy. Their supply chains are as intertwined with the US as ours are. We have a lot of Canadian investors in Mexico, particularly in the mining sector and other areas. So there's a lot of integration even between Canada and Mexico. And at the end of the day, if we're trying to strengthen the North American economy, and most areas of the world are moving towards more regional economies, then Canada and Mexico- Canada and the US need Mexico as a lower cost producer to fill that kind of gap. Canada and the U.S. are very much the same in terms of their of their costs of production, those kinds of things. Mexico brings an added element of lower cost production. If we didn't have that in North America, we'd have to look elsewhere. So I see Mexico as a good fit in the North American economy, as an ally who can be very useful to Canada through this process. And I think it would be very much a mistake to leave them behind. Otherwise, we will be left going head to head with the U.S. and the demands on us will be significantly stronger. 

Allison Hakomaki:        Excellent. Thank you very much. Doug, this- I am sitting in Alberta, and so I also know that several people have written in, asking about your thoughts about how oil exports would be affected, given it's our largest export to the US. So what are your thoughts? 

Doug Porter:     And I have to say, the fact that, you know, this this threat applied to all exports, including energy, does somewhat reduce the credibility of it because it would work at cross-purposes with, you know, with what the president-elect is trying to achieve elsewhere. But let's play, you know, play a game and figure out what it might mean for Canadian oil exports. And frankly, this is- this is something that that we're all grappling with is exactly who would bear the cost of a 25% tariff on Canadian oil exports, because you're in a very unusual situation where realistically, Canadian producers would have extreme difficulty sending it anywhere other than the Midwest and Midwest buyers would have a great deal of difficulty, at least over the short term, sourcing that oil from anywhere else in the world because it is a very particular brand that refiners are set up to deal with it, so it's not at all clear who would bear the cost. I suspect that there would be some shared burden. I am concerned that ultimately a lot of it would fall on Canadian producers. But I would just stress again, and the others have made this point, that it really does work at cross-purposes, and frankly, I think it does somewhat reduce the credibility of the overall threat that that oil and gas and electricity presumably would be included under this blanket tariff. 

Allison Hakomaki:     Right. Thanks. Yung-Yu, do you have any thoughts with regards to energy? 

Yung-Yu Ma:     Well, I do think that energy, along with some agricultural sector products, things that are very front and center to inflation in the U.S. would probably be the first to get exemptions. It's just across the board tariff idea is very unlikely at any levels, I think, to actually come through. If anything comes through, it's probably going to be targeted tariffs in certain areas at lower levels that's being talked about, because what is the U.S. very sensitive to? The U.S. is very sensitive to gasoline prices. The US is very sensitive to prices in the grocery store. So that even though the impact on inflation might not- the headline numbers might not be as strong, the impact psychologically to consumers is extremely strong. So that's part of what Trump campaigned on, was how high grocery prices were and gas prices. It's unlikely that those areas would see any kind of tariffs and if anything, is to see tariffs, I think- I think the administration would try to choose areas that it saw as less front and center in U.S. consumer psychology. But again, I think this is part of a multi-step negotiating strategy that the Trump administration is taking with the end topic, the end goal, being USMCA renegotiation. 

Steve Verheul:     Sorry, can I just jump in on that?

Allison Hakomaki:    For sure.

Steve Verheul:    Well, I just wanted to add that certainly I agree that the first areas that would be potentially subject to exemption would be oil and gas and food. But from a Canadian perspective, that's clearly understood. And I think that there is some thinking going on that if that's the case, then it might even make sense for Canada to apply export taxes to those products in order to try to negotiate a broader exemption across all the sectors. I think this fight could escalate in certain ways, if that kind of action is taken. 

Allison Hakomaki:     Well, thanks very much. So, Doug, why is the TSX at a record high with these tariff threats looming? 

Doug Porter:     So very, very big picture. First of all, the TSX is really not that reflective of the Canadian economy. I think that's well understood. It's really more of a reflection of the global economy to a much greater degree. And of course, it's largely moved in lockstep with the with the S&P 500 more recently. In fact, in the last six months, famously, the TSX has actually slightly outperformed the S&P 500 after underperforming it previously. I think simply put, some of that does come down to the fact that we've had a better trade off globally and especially in the U.S. and that even to some extent Canada, between inflation and growth in the last couple of years. I think if you think back to two years ago, the conventional wisdom was that we were going to have to go through a recession to get inflation down from 8% and 9% in Canada and the U.S. to close to target of 2%. Here we are 2% in Canada, just a little bit above 2%. The US economy is still clicking along at almost 3% growth. And Canada, as I said, looks like it's starting to pick up after a couple of years of 1%. That's a much better environment, I think, than many of us could have imagined a couple of years ago. And fundamentally, that improved trade off is good news for the equity market. On top of that, we've definitely seen a post-election bump. I think markets are focused on the positive aspects of what Mr. Trump has proposed, whether it's, you know, a lighter regulatory touch or, you know, some potential tax relief. And there they're sort of sidelining the concerns about, you know, the more protectionist policies or perhaps some of the spending cuts we're likely looking at to pay for some of the tax relief. 

Allison Hakomaki:     Great. Thanks. Steve, you recently published an op-ed about how Canada will be in a different position to respond this way- this time around. I wonder if you could share a few of your insights about how the government should be responding. What's underway as we prepare for January 20th? 

Steve Verheul:     Well, I think one of our challenges this time around is that we don't have the unified Canadian or Team Canada position that we had during the original CUSMA negotiations. At that time, we had the political parties largely aligned behind the Canadian effort. We had a lot of support from provinces and territories, and we had industry and labor clearly a part of the team as well. This time around, the political situation is much different and I think we all know what the polls look like. We know that there's an election next year. Provinces and territories are in different places. We've got the premiers of Ontario, premiers of Alberta putting out different ideas, and we're not entirely speaking with one voice in the negotiations. And I would also say that particularly when it comes to industry and labor, we have not been doing the kind of analysis, the kind of consultations that need to be done to get everybody on the same page when it comes to what should the Canadian strategy be and how are we going to deliver it. And it's important to get everybody on that page, because that, last time, was our greatest strength in the negotiations. We understood our industry, they understood our strategy, and we managed to get to a much deeper level of understanding of issues and of how to move the issues forward, compared to the U.S., which was barely consulting their industry at all. 

Allison Hakomaki:     Thank you. Yung-Yu, there's lots- lots of questions coming in with regards to people's individual approaches to their investment portfolios. How- could you speak a bit to that? What they can anticipate over the next while as it relates to investing in the US? 

Yung-Yu Ma:     Sure. Absolutely. And I think the context of President Trump's approach in this case being an example of that, of coming out with a big announcement and then kind of seeing how things shake out, and even if tariffs are put on, seeing where the exemptions take place and really kind of navigating through this through this uncertainty is part of the approach of the administration. And that's going to be with us for some time to come. And that's just the reality of the environment that we have going forward here.

We do think for investment portfolios, especially in terms of our U.S. investments, that we- on the recommendations we make, that the eye that the economy is still healthy, that the market underpinnings are still strong, and probably the greatest strength we see is continued productivity gains. And productivity, we like to talk about that as a silver bullet. Productivity allows for economic growth. It allows for wage gains without inflation and really provides a backdrop where you can have your cake and eat it, too. And we think that's going to be coming through in 2025 the way it did in 2024 and perhaps even stronger. Now, that doesn't mean it's a perfect picture. We do think that with that productivity means that there's going to be a soft a hiring environment, especially for white collar jobs. We're starting to see that now. We think that's going to become more pronounced as the year progresses. But that does mean good profitability to the bottom lines of corporations. So, we think the environment is healthy to invest in the U.S. in terms of taking risk. It's going to be volatile, though. We think there's headline risk. We saw that in 2018, when there was the tariff wars or trade wars with China that oftentimes in these announcements or retaliatory measures would come out, that the market would drop a percent or two. Usually it would rebound pretty quickly, but it depends on how all this plays out. And so we're not dismissing the idea that we could have more meaningful pullback in 2025. But we do think President Trump's overall approach is one of negotiation.

It's worth remembering that he took four of his companies into bankruptcy in order to renegotiate contracts. That's what bankruptcy does, and this, in and of itself, for the approach he's taking now, is also a type of renegotiation, and that is his ultimate goal to bring manufacturing back, to try to exact better terms for the U.S. But we think the underpinnings of the U.S. economy are enough to withstand some of this turbulence and that it's still a healthy investment environment. So we're not scaling- pulling back from risk here. We still think it's a healthy environment for risk taking, but we are advising clients that we have to be more prepared, one, prepared to take advantage of opportunities that might arise, but two, to be prepared for more volatility than they've been used to for the past year. 

Allison Hakomaki:     Great. Thanks. Doug, Trump has made a threat to impose a 100% tariff on the BRICS if they try to undercut the US dollar. Why, and how real is this threat? 

Doug Porter:     So, if we if we look at big picture, first of all, 100% is an extraordinary number. You know, that would basically block imports from some of the largest economies in the world. But I think- I think, you know, the bigger story here is it shows how seriously the president-elect is taking the threat to the extraordinary privilege of the strength of the US dollar, it being the ultimate reserve currency. The BRICs have, you know, Brazil talked about the possibility of a BRICs currency. I do not believe that is going to happen. But the broader push to try to reduce the dependency on the U.S. dollar I think is very real. And in turn, I think the U.S. takes it seriously. This is a rather spectacular threat that he’s leveled against the BRICs, and it shows you, I think, how concerned he is by this this development.

It's interesting, though, that, you know, and we've heard about this for a number of years, It's gained some momentum more recently about, you know, various members of the BRICs trying to reduce the dependency on the U.S. dollar. What is the U.S. dollar done through this? It's gone higher. It's strengthened. Obviously, there's still quite a bit of underlying demand in the rest of the world. And even some of the BRICs themselves have actually increased their holdings of Treasuries in the last year or so. So, you know, it's curious that, you know, at the end of the day, the U.S. dollar is still heavily under demand. But, you know, longer term, I think there are there is some reality, too, to this threat of U.S. dollar dominance, and we're seeing a response to it. I do not believe we're going to get 100% tariffs, though. 

Allison Hakomaki:     Okay. Thanks. Steve, I'd love for you to share your thoughts about how might Canada respond if there is an upcoming change in government? 

Steve Verheul:     Well, we don't have a lot of clues about that so far. I think that when it comes right down to it, as we continue to get views from industry and from labor and from provinces and territories as well. But industry and labor, particularly industry, is going to have the same views for the interests of their companies as they would have under a Conservative government, a Liberal government, or an NDP government. Their interests are the same. So I think it would be very difficult for any change of government if the Conservatives came in, for example, to go in a very different direction because they would be getting the same kind of feedback from industry as the current government gets. So I don't see a big change. There could be changes in tactics. Pierre Poilievre may feel that he has a closer relationship, potentially, with some of his counterparts in the U.S. and that may be an angle that could be pursued. But fundamentally, I don't think there would be all that much of a change, less than we would probably expect, because of the consistent nature of what industry is looking to achieve. 

Allison Hakomaki:     Thank you. Doug, a question has come in, of our- the view of the bank’s forecast for interest rate cuts, I think we've- BMO’s estimated three upcoming cuts. Do you think that will change, depending on what we're seeing with regards to this tariff front? 

Doug Porter:     So the Bank of Canada is in a bit of a difficult situation here. On the one side, clearly, the risks to growth would make them more biased to cut interest rates than would otherwise be the case, as I suggested earlier. But on the flip side, if the Canadian dollar weakens at the same time, and if the Canadian government decides to retaliate with tariffs of its own, those can put a little bit of upward pressure on inflation. So it wouldn't be a one-way street for the Bank Canada. Ultimately, I think the threat to growth would dominate, and so they would be more biased to ease in a situation. There would be more bias to cut rates more deeply than what we've been calling for.

Just to step back for a moment, our view has actually been for five consecutive quarter point cuts on top of what they've already done. So we had the Bank of Canada cutting interest rates to 2.5% by just around the summer of 2025. At one point, we'd actually scaled that back a little bit. I believe with these tariff threats, we have to start pulling it a bit forward again. Full disclosure, we had been assuming a quarter point cut at next week's decision. It may well come down to what this Friday's employment report shows. But I have to say at the margin, this threat of tariffs does slightly increase the chances of the Bank of Canada cutting more deeply sooner, basically to inoculate the economy from the risk of tariff threats.

The next Bank of Canada meeting actually isn't until after the inauguration day. So if, in fact, Mr. Trump lived up to his threat of imposing tariffs on day one, the next time the Bank of Canada would meet after next week's meeting would be it with the tariffs in place. And in some sense, it’d almost be too late. So I do think if they think this is a serious threat, I think it does slightly increase the odds of a 50 basis point rate cut next week. 

Allison Hakomaki:     Great. Thanks so much. Well, there is a lot for businesses, consumers, to be thinking about. I would love to have some of your near closing thoughts. And Steve, you've been in the thick of it. So, what do you think? Where do we go from here and what are you going to be watching for in the near term? 

Steve Verheul:     Well, I'll be watching for how quickly the U.S. moves, because I think if tariffs are put in place initially, as he's threatened on January 20th, then there will be a bit of a scramble to try to find a way to deal with that. I think it won't take long to try to steer this into an actual negotiation. We have a review of the of the agreement coming up in 2026, but that's kind of the end point. 2025 is really going to be the negotiating period. So I think there's a good chance that all of these tariff discussions will start to evolve into a renegotiation of the agreement, and we would attempt to address some of those issues within that negotiation. So, hopefully short-term, but it's going to be a rocky period and a lot of chaos in the market. 

Allison Hakomaki:     All right. Thanks. Yung-Yu, what are your final thoughts? What are you going to be watching for? 

Yung-Yu Ma:    Right. In terms of this specific issue, really watching to see what some of the news flow is and statements that are made specifically about the- about some of the border security that the Trump administration is requesting or the incoming Trump administration is requesting, be strengthened. And there- and then President Trump's response to that. And Tom Homan, the soon to be appointed border czar, his response to that as well. I think that's going to give us a lot of direction on what's going to be happening on day one in terms of these potential tariff threats. But my suspicion is there will be- there'll be enough action that this concern will be largely alleviated by inauguration day, which is January 20th. But it may not be completely alleviated and there still could be lingering issues or potential for President Trump to say, let's wait to see that that these talked about measures are actually enacted and that are bearing fruit and seeing results and putting on some nominal tariffs until he's satisfied that those results are seen. So, I think what we- what comes out of both the Canadian side and the U.S. side is going to be very impactful in the coming weeks. 

Allison Hakomaki:     Thank you. And over to you, Doug, for your final thoughts about where do we go from here and what are you going to be watching? 

Doug Porter:     Well, I think if we pull all the threads together from what we just heard, I think the main message is, even if this is, you know, if this threat does tend to pass, the reality is we're dealing with an overtly protectionist president who is very fond of using tariffs, who will continue to threaten some major trading partners, even friendly trading partners, with the potential of tariffs. I think we are going to be living with much more trade uncertainty than what we're dealing with, arguably even more so than in the first Trump administration. And unfortunately, I think what that means is ultimately we are likely looking at a chill in business investment in Canada, especially investment aimed at exports. And it ultimately means that that will have to be compensated somewhat by, at the margin, lower interest rates and a weaker exchange rate than would otherwise be the case to support growth in other areas. And we're probably going to end up with a little bit more of a tilt to consumer spending and housing and as I said earlier, less so on exports and business investment. And it's a challenge, no question, for the Canadian economy. 

Allison Hakomaki:     Well, given that, you know, I would encourage all of our customers, be it commercial or consumer, reach out to your BMO experts. We're here to help navigate through this uncertainty. It is going to be an interesting period in the next four years.

We've covered a lot of ground exploring the implications of these tariffs and what they could mean to business and consumers. And I just want to sincerely thank Steve, Doug and Yung-Yu. Your insights have been very much appreciated and valued. I think you've brought a lot of much-needed context to our clients. This has certainly been a very popular webcast, because it's very, very topical. And I'd like to thank all of you for joining us to listen to our podcast today. There will be a podcast and recap article on our website, Commercial.bmo.com and bmo.cm.com. But if you have any questions again, please don't hesitate to contact your relationship manager. Thanks to everybody and I hope you have a great rest of your day. 

Yung-Yu Ma:    Thank you.