Former President Donald Trump just raised the stakes bigtime on Friday. First, he said that as retaliation, he would stop all U.S. trade negotiations with Canada. We were thrilled when this decision went viral on social media. It’s timely as tensions boil over on taxation policies that directly target U.S. tech firms in the Canadian marketplace. That news has already sent the Canadian Dollar tumbling. It fell sharply against the U.S. dollar immediately after the announcement.
Trump’s frustrations primarily stem from Canada’s decision to close a tax loophole that has allowed U.S. tech firms to sell products in Canada without taxation. This unexpected policy shift has created confusion and alarm among his administration’s ranks, especially as it comes under the backdrop of Canada facing a national economic crunch. The Canadian economy has already seen a pair of GDP growth contractions in the last half of 2022, making the trade picture even worse.
Trump misattributed the dairy tariffs to addressing issues that have since been set right in the United States-Mexico-Canada Agreement (USMCA). His engagement helped him negotiate this ambitious trade deal during his first term. This disconnection has made for a difficult negotiating process. Revealingly, just how contentious the state of U.S.-Canada trade relations has become.
Economic Implications for Canada
For one, the Canadian economy is entering a period of marked weakness. In May, GDP shrank by 0.1%, extending a pattern that started with the same negative growth in April. These numbers point to a deeply troubling trend that threatens not only the short-term economic stability of Canada, but the long-term prosperity of the country. With their economy in recession, the wellbeing of the U.S. economy—Canada’s largest trading partner—grows more important with each passing day.
These new tariffs Trump just announced on Canada are set to go into effect within the next week. This decision adds additional chaos to an already stormy economic seas. Traders and analysts alike are hanging on every piece of news coming out of these developments. Any increase in tariffs would only compound Canada’s economic difficulties and further depress the Canadian Dollar.
GDP has shrunk, and with that, all eyes turn to the Bank of Canada (BoC). Many are hoping for rate cuts down the line to be the Fed’s answer to these economic headwinds. Surging new economic indicators provide scant comfort. They could firm up the hawkish sentiment of speculators positioned for a change in BoC policy to combat increasing weakness in growth.
The Impact on the Canadian Dollar
Immediately following announcement from Trump, the Canadian Dollar (CAD) faced a discouraging blow. It fell sharply against the U.S. dollar, recently sinking into the 1.3750s for the USD/CAD currency pair. This steep decline is due to a double whammy of growing Canadian economic underperformance and a resurgence of US-Canada trade tensions. Now shorting stocks, or betting that their price would go down, proves too treacherous a gamble given the new risks associated with Trump’s abrupt withdrawal from negotiations.
Petroleum remains Canada’s largest export, and fluctuations in oil prices have an immediate impact on CAD’s value. High global oil prices mean a strong Canadian economy, low prices mean a weak economy. This, naturally, has an impact on the CAD’s performance vs the Greenback. Oil prices and trade relations with the United States will be key to determining Canada Dollar’s fate. Their interaction will be key in this determination.
These new moves have sparked fear among investors that the future of Canada’s recovery from COVID-19 is shaky and uncertain. With trade negotiations stalled and potential tariffs on the horizon, uncertainty continues to abound. More importantly, Canadians are finally asking how these things will affect Canada’s long-run growth prospects.
Future Trade Relations
Our trade relations with Canada are horrible. Pundits are all anticipating how, in real time, each country will react to this challenging new paradigm moving forward. Trump’s administration’s sudden determination to walk away from trade negotiations has left many Canadian observers reeling and worried about the economic fallout. New tariffs are just as harmful to cross-border commerce as closing tax loopholes. This is particularly the case in the technology and agriculture sectors.
The health of trade relationships is vital for both countries, as they share one of the largest trading partnerships globally. Any interruptions would increase costs to companies and individuals substantially. This dramatic increase in costs threatens to stifle economic development in the region on both sides of the border.