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

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U.S. President-Elect Donald Trump’s threats to impose a 25% tariff on all Canadian and Mexican products may be a way to bargain with important trade partners but it doesn’t diminish the urgent need for North American markets to prepare for potential duties.

That was the main takeaway of a digital event that BMO hosted The Trump Tariff Threat, a panel discussion, featuring:

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  Steve Verheul, Former Chief Trade Negotiator for Canada

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  (Moderator) Allison Hakomaki, Head, National Agriculture, Public Sector & Emerging Industries, BMO Commercial Bank, Canada

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  Doug Porter, Chief Economist, BMO Financial Group

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  Yung-Yu Ma, Chief Investment Officer, BMO Wealth Management - U.S.

The North American business community was set abuzz on November 25, when Trump announced via social media his pledge “to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States.”

The post triggered swift reactions from the two nations, with the leaders from both countries mounting a diplomatic offensive to smooth relations before Trump is inaugurated for his second term in the White House on January 20.

Few know the importance of a healthy trade relationship between Canada and the U.S. than Steve Verheul, the former Chief Trade Negotiator for Canada who worked on the Canada-United States-Mexico Agreement (CUSMA), which replaced NAFTA during Trump’s first term.

“If President-Elect Trump did impose 25% tariffs against Canada and Mexico, it would leave the countries with worse access to the U.S. market than the other 166 members of the World Trade Organization,” he said.

If Trump does follow through on his tariff threat, only Russia, North Korea and a handful of other countries would have worse access to the U.S. market than Canada and Mexico, which are the two largest U.S. trading partners, Verheul explained. “There’s a certain aspect of this that seems less than credible, but that doesn’t mean we shouldn’t be preparing for it,” he said.

BMO’s Chief Economist Doug Porter agreed. “Big picture, the financial markets simply do not believe that this is going to come to pass,” he said, but cautioned that Canada still needs to approach this situation as though the tariffs will be enacted. From a Canadian perspective, the risk to this important trade relationship, even if a scaled-back version of the tariffs were to be imposed, is too big to be dismissed.

Tariffs could have an inflationary impact on both sides of the border, said Porter. Even though there is some debate about how inflationary tariffs could be, at the very least, they throw sand in the gears of trade, he added.

Porter said the Canadian Chamber of Commerce estimates that a 25% tariff would also carve about two percentage points from Canada’s expected GDP growth in the first year of implementation. The Bank of Canada would then have to slash rates to between 1.5% and 2.5% from its current 3.75%. The tariffs would also likely cause the Canadian dollar to pull back by 5% to 10% from its current levels, he added. Of note, none of the scenarios factor in any retaliatory actions by Canada or the chill it would put into business investment.

Indeed, Canada could retaliate, likely by imposing its own tariffs on U.S. imports or using export taxes to apply pressure to parts of the U.S. economy that rely on Canadian goods, said Verheul. “Canada would focus on areas where you try to cause the maximum damage or irritation in the U.S. market,” he noted.

Allison Hakomaki, Head, National Agriculture, Public Sector & Emerging Industries, BMO Commercial Bank, Canada, noted there were a number of questions from the audience who wanted to know how the tariffs might impact on the energy sector.

Porter responded that any trade dispute is unlikely to directly target the energy sector because it would work at cross-purposes for both countries. The price of oil is very central to Trump’s initiatives to lower costs. Should the U.S. try to put pressure on other oil-producing nations like Iran, then Canadian oil becomes even more important, he explained.

Canada is in a similar bind to try and find another market for its oil outside of the U.S. Midwest, at least in the near term. Not only would it be challenging to ship that oil to a new market, but, as Porter points out, the refineries in the Midwest are specifically set up to handle the type of crude that comes out of Canada.

Even if the U.S. does not end up implementing a 25% blanket tariff, Yung-Yu Ma, Chief Investment Officer at BMO Wealth Management - U.S., said he wouldn’t rule out the use of more targeted tariffs as a negotiating tactic. To Ma, the tariffs are about enacting programs that Trump believes are important, including bringing manufacturing back to the U.S.

For the most part, Ma said he expected Trump would be unconstrained if he follows through on his plan to impose tariffs in whatever form that might take, and figures it will be a bigger part of his policy compared to his first term, when his signature bill was centered on tax cuts.

“Tax cuts are going to play a much smaller role this term,” said Ma, noting that the current budget situation in the U.S. doesn’t leave much room for substantial cuts beyond extending the tax breaks that were enacted in 2017. “Tariffs, trade, and this idea of trying to bring back manufacturing are really going to be front and center in the government’s policies,” he said.

The challenge now is Canada doesn’t have a unified response to Trump the way the country did during the CUSMA negotiations, said Verheul. The political situation in Canada is much different today, not just because there will be an election in 2025 but because of the varied political situations in the provinces. “We’re not entirely speaking with one voice in the negotiations,” he noted. “It’s important to get everybody on that page because that was our greatest strength in the negotiations last time.”

Excluding Mexico from the conversation would be a mistake, said Verheul. “We need Mexico at the table, and it’s not just from the perspective of helping us out,” he said.

Beyond strengthening Canada’s negotiating position, Verheul acknowledged Mexico’s significant contributions to the North American economy. “Their supply chains are as intertwined with the U.S. as ours are,” he said.

Regardless of the threats, Porter said it’s clear that Trump will be an overtly protectionist president who will continue to threaten some major trading partners, including friendly ones, with potential tariffs. “There is no sugarcoating it,” he said. “There is a much bigger negative, potentially, for the Mexican and the Canadian economies.”