The tightly integrated North American automobile industry has been given a one-month reprieve from the 25% tariffs U.S. President Donald Trump slapped on Canadian imports Tuesday.
“We spoke with the big three auto dealers,” Trump said in a statement read by a spokesperson, according to The Associated Press, referring to Ford, General Motors and Stellantis. “We are going to give a one-month exemption on any autos coming through [the U.S.-Mexico-Canada trade agreement].”
The move is not expected to prompt changes to the retaliatory tariffs announced by Prime Minister Justin Trudeau on Tuesday. In an interview with CBC News, Canadian Finance Minister Dominic LeBlanc said, “We’re not interested in meeting in the middle and having some reduced tariff. Canada wants the tariffs removed.”
The Canadian Press reported that Trump and Trudeau spoke by telephone Wednesday, according to a social media post. Referring to fentanyl crossing into the U.S. from Canada, Trump wrote: “He [Trudeau] said that it’s gotten better, but I said, ‘that’s not good enough.’ The call ended in a ‘somewhat’ friendly manner!”
Before Trump’s announcement, the developing trade war was discussed at an event hosted by Morningstar DBRS in Toronto.
“I don’t think the tariffs that are extended right now are going to be the same tariffs that we see a year from now,” said U.S. market strategist at Morningstar Research Services in Chicago. He told the audience to expect further negotiations, and eventually “a united front between the U.S., Canada, Mexico and then some of the central South American countries” to compete with China.
“I think about it like two heavyweight boxers in the ring,” he said, describing the U.S. and China. “Both are looking for some openings, but are really just strategizing as far as how they want to conduct that fight when it starts in earnest.”
Stagflation worries
In the meantime, global asset allocation portfolio manager at Fidelity Investments in Toronto, is worried about stagflation — the combination of inflation, unemployment and slow or negative economic growth — here and in the U.S.
He said the trade war will have mostly an inflationary effect on the U.S. economy. Canadians are more likely to feel a gross domestic product slowdown or worse, “just given how important exports are to our economy and how much that hit to demand could dominate whatever we see in terms of the inflationary consequences,” he said.
Tulk, a former economist with the Bank of Canada, said this may send the two central banks in separate directions.
“I think [the Fed] is pretty much comfortable remaining on the sidelines until there’s an obvious signal that growth is slowing more than they anticipate. And the Bank of Canada sort of said the same thing, with the proviso that if they do get this tariff shock, they will have to most likely resume cutting interest rates.”
Stephen Lingard, SVP, co-head of multi-asset at CI Global Asset Management in Toronto agreed that the U.S. could see stagflation. “It is a headwind, traditionally, in the short term,” he said.
Lingard also said it would be a mistake to look back on the tariffs Trump applied in his first term for guidance on how this second round will play out. He said the economy has changed too much for that. “You can’t use the old playbook,” he said.
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