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Why domino effect of tariffs should worry investors

March 7, 2018


The potential domino effect of the US imposing trade tariffs on steel and aluminum is far scarier for investors than President Donald Trump’s singular threat.

That’s the view of Grant White, investment advisor at National Bank Financial, who is evaluating opportunities in companies both sides of the border as the markets scramble to assess the impact of Trump’s plans and his declaration that “trade wars are good and easily won”.

The President wants to impose a 25% tariff on imported steel and 10% on aluminum, although he was facing increasing opposition yesterday from within his own Republican party, including the resignation of his economic advisor Gary Cohn.

Trump has been explicit in using the threat of tariffs to strengthen his hand in NAFTA negotiations with Canada, adding to market volatility and the overall uncertainty for businesses and the economy north of the border.

White said: “There is potential that this could hurt Canada because we are the biggest partner for them in [steel and aluminum]. So certainly in those spaces it could have a negative impact. There is always a trickle-down effect with how closely our banks are tied to this as well. I’m not saying this is going to create a major trauma but you never know and cantagion can spread.”

He added: “I do think the biggest worry with this is not just with steel and aluminum, it’s the effect of other countries starting to lay tariffs on other things - it just creates a domino effect. That is more scary than this one event.”

White said some clients have been alarmed by this week’s news and said Trump’s unpredictable nature means it’s important to be more active in communicating with members, stressing the long-term plan over the short-term volatility a trade war could create. He said it’s his job to cut the noise and focus on fundamentals.

He said: “Focus on quality and don’t react to the news, especially in this case. Nothing is set in stone yet. I just wrote a piece for our members, saying there is clearly a number of chapters still left in the NAFTA story and so I think we still need to hang tight and see how this thing plays out.

“Be prepared at the same time. I’m saying hang tight but I’ve also been adding more protection to my portfolios for the past two years. That’s mostly been in perspective of fundamentals, given how the markets have been expensive. So this just gives me another reason to do that. I will stick to my guns on that and take profits a little bit off the table, primarily because I want to control the volatility my clients are seeing.”

In the bigger picture, White believes tariffs are a bad idea not just for Canada but also for America, citing the job losses the US suffered when George Bush implemented them in 2002.

It’s a point also highlighted by Eric Lascelles, chief economist for RBC Asset Management, in his weekly economic wrap-up. He believes a similar trade war to the one Bush created is a genuine possibility and that the ongoing tit-for-tat approach “risks protectionism spiralling higher and becoming a serious global growth drag”.

He said: “The biggest hit is plainly to Canada, which is the number one exporter of both steel and aluminum to the US. Canada exports 16% of US steel demand and 40% of US aluminum demand. Canadian exports of steel and aluminum are worth 0.7% to its own GDP – more than double any other country.

“Thus, the tariff could be consequential for Canada, potentially to the tune of several tenths of a percentage point of GDP. Supply chain complications could make the effect worse for both countries. Tariffs are less obviously inflationary to the countries paying them, though that depends on the currency response.”

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