The trade wars have begun, and no one really understands why….

And so begins the most unnecessary trade war in recent (all?) memory.

Following Donald Trump’s decision to place 25% tariffs on nearly all products arriving to the US from Canada, Justin Trudeau and the Canadian government responded swiftly with equal 25% tariffs on goods arriving from the US.

Now whether President Trump never truly believed Canada would respond in-kind can be up for debate, but what isn’t up for debate is that if Trump was looking for a fight; he found one. The announcement of the trade tariffs came with widespread confusion and criticism. This man ran on the promise of lower prices and working for the average American. The guise of caring about the ‘average Joe’ seemed to have worked as Trump won a resounding victory in November. Following through on his threat of tariffs, however, speaks to a completely different narrative. Tariffs, or any additional tax on goods, is inherently inflationary. Higher import costs, despite the online narrative amongst his staunchest supporters, are not paid for by the exporting country. They are paid for by the importing country and in almost all cases and therefore, passed down to the consumer at the end of the supply chain.

An example: Walmart, one of the biggest companies on the planet, imports a household item from Canada. Let’s use Paper Towel in this case. So before Tuesday, February 4th, Walmart imported Paper Towel for $1.00. It sold that paper towel in it’s stores for $1.10. A healthy 10% margin on a product they likely sell by the 10s of millions every year.

Starting Tuesday, Walmart will still be paying $1.00 to Canada for the Paper Towel. However, once it crosses the border, Walmart owes an additional $0.25 on top of the dollar. It is now impossible for Walmart to sell that paper towel in its stores for $1.10 as they are now out $0.15 for every unit they sell. Now admittedly, I’m not an Economics major but that to me doesn’t scream good business. Trump may have missed that class.

So Walmart has a decision to make. They can either:

a) Eat the additional $0.15 per unit and nominate themselves for the Nobel Peace Prize in Humanitarian Efforts

-OR-

b) They can pass that cost on to their customers and maintain their 10% margin. So in this case, the total cost of $1.25 is marked up by that 10% margin, resulting in a ticket price of $1.37 for their customer.

Given that Walmart has shareholders to appease on a quarterly basis, it’s safe to assume that they view tariffs as the price of doing business and will choose option B. It is out of their control whether the Executive Branch of Government will continue to cut off their nose to spite their face. Congratulations Mr. President, it’s been about 3 weeks since your inauguration and you just lost the fight against inflation.

In an attempt to keep their costs down, the prevailing thought is that the Walmarts of the world will try to produce more of their goods domestically, which is likely Trumps end goal. It creates more jobs, stimulates the economy and makes his numbers, outside of inflation, look good. The problem here is that higher input costs and further inflation on an already cash-strapped middle and lower class still recovering from the high single digit inflation environment of 2020/2021 is likely to hinder your economy more than help it. Discretionary spending, which is in recovery mode, will again shrink as the average citizen has to tighten their wallet on unnecessary costs as the cost for their everyday staples has increased dramatically.

Outside of the 25% tariffs imposed on good entering the US, Trump also indicated that a 10% tariff would be placed on all oil entering the US from Canada. I truly don’t know what his long game is here as he indicated during his campaign that the US needed to drill more while keeping the price at the pump low. As indicated by the chart below, Canada is far and away the largest provider of outsourced oil to the US.

That oil just became 10% more expensive and if the plan is to drill more and outlay billions of dollars in capital in order to do so, the resulting price increase at the pump is sure to surprise. Another master stroke in the fight against inflation. For all the energy Trump puts into quelling the momentum of renewable and electric energy, it may be the benefactor of some of the most ironic policy making in recent history.

Trump built escalators into his tariff legislation. Meaning that if the countries he imposed tariffs on were to respond in-kind with tariffs of their own, the original tariffs would either expand in scope or expand in cost. The bluff apparently did not take as both Mexico and Canada responded immediately. As of this writing, Trump has officially delayed the tariffs placed on Mexico in response to Mexico’s deployment of more troops on their border. The import taxes on Canada and China remain but Trump is scheduled to speak with Trudeau again at 3:00PM on Monday, the 3rd. All this is to say that the tariffs are based on border security at both the Mexican and Canadian border.

One has to wonder if his 51st state talk was a joke made at the dinner table that got so many laughs that it has spun violently out of control thanks to its popularity on social media and daytime political shows. Getting rid of the “artificial line” and it’s security certainly wouldn’t help the fight against fentanyl making its way across that now defunct border, would it?

The tariffs placed on China and semi-conductor chips manufactured in Taiwan seem to be locked in but thus far, the news about Deepseek AI has had a much more impactful affect on the semi stocks that has spurred so much performance in the last few years. China retaliated with tariffs of their own, ensuring that trade and relations between the two countries will likely worsen if this situation is allowed to spiral out of control.

So what does this mean for you?

In short, volatility. Tariffs mean higher prices, possibly lower margins and shrinking growth. As stated above, if the average consumer has $100 a month to spend on both staples and discretionary spending, tariffs all but ensure that more of that $100 is used on staples, leaving less room for disrectionary, a crucial part of a countries economic growth. The same principle can be applied to the average company. If a company has $1M to spend on the material inputs, their workforce, and R&D in order to grow the business, these same tariffs ensure that more capital needs to be reserved strictly for inputs, leaving less for workforce (wage growth/bonuses or even layoffs), R&D (new products/product innovation) and CapEx spending (manufacturing upgrades or warehousing/space). While not immediate, economic indicators will bear these numbers out eventually should these tariffs continue and there will be pullbacks marketwide as investors adjust to accept a new environment of lower earnings and slowing growth. In the short term however, market ups and downs will be dictated by headlines and progress/lack thereof to these tariffs getting resolved.

I expect that if tariffs are held in place through the deadline for negotiations, the most affected sectors will be Energy, Consumer Discretionary/Apparal and Tech, not in any order. If volatility continues for an extended period of time, we will take advantage by averaging down on quality names that we own, or initiating a new position on a company that looks to be too heavily beaten up.

Having said all that, the Futures on the DOW were down as much as 600 points on Sunday evening, signalling a difficult day to come on Monday. However, as of this writing, the DOW is down 125 points, or about 0.25%, which tells me that the markets are betting for a swifter resolution than anticipated over the weekend. Now keep in mind, breaking news, either positive or negative in getting this situation resolved, is going to move the market, of that there is no doubt. But, I believe that in a fight with no winners, cooler heads will eventually prevail and it will be business as usual moving forward.

So what do we do now?

Nothing. There isn’t enough information available and members from all governments involved are still trying to find a solution, or at least buy themselves more time to evaluate a long-term solution.

As always, feel free to reach out with questions or concerns, but the message from us is clear. While short-term volatility always exists, the long-term prospects of the market should not be affected by the bluster of one man’s delicate ego. The threat of these tariffs are likely just that. Threats. And in a fight where there is too much to lose and not enough to gain, there should be some concessions on both sides in order to avoid much more widespread effects.

Update: As of 4PM EST on February 3rd, President Trump has delayed the start of the tariffs on both Mexico and Canada until at least March 1st as both Canada and Mexico have outlined plans to strengthen border security. It remains to be seen if the President will try further negotiating tactics once those deadlines get closer. We will continue to wait for another

This information has been prepared by James Hogan, who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.