A month ago, as outlined in our February Tariff Commentary, the Trump administration had decided to delay imposing the tariffs for 30-days. Now that the month has lapsed, President Trump was again looking to reimpose the 25% tariffs on Canada and Mexico and the additional 10% on China.

Here is the timeline of the ongoing tariff situation since the pause in early February:

• February 3, 2025: The U.S. pauses its planned tariffs on three of its major trading partners: Canada, Mexico and China. This delay is also applied to the additional lesser 10% tariff on Canadian energy. As a condition of this delay, the U.S. had sought commitments from Canada and Mexico to improve border security and combat drug trafficking.
• March 2025: The delayed tariffs on Canada and Mexico are set to be reimposed, with the U.S. considering the same 25% tariffs on imports from Canada and Mexico and the additional 10% on China.
• March 5, 2025: Trump announces that automakers will be granted a one-month exemption from the tariffs after speaking to the “Big-Three” automakers of Ford, General Motors and Stellantis.
• March 6, 2025: U.S. commerce secretary, Howard Lutnick says that Trump will grant another 30-day postponement to exempt all goods compliant to the USMCA trade deal. First Mexico is given the one-month exemption and Canada is later also confirmed to be included.

The on-again, off-again nature of the tariffs has fueled market volatility, as illustrated in the accompanying charts. Although the CBOE Market Volatility Index (VIX) has increased, its closing levels understate the intraday volatility in equity markets. Furthermore, the threat of tariffs has exacerbated the realized volatility in the USD/CAD exchange rate, compounding the impact of the growing interest rate differential.

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Intraday Equity Market Volatility has been on the Rise

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Realized Volatility in the USD/CAD Exchange Rate has Elevated

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While Trump has cited fentanyl and border security as primary concerns, it's unclear what specific actions are needed to resolve the tariff issue permanently. In response to these concerns, the Canadian government has appointed a "Fentanyl Czar" and launched Operation Blizzard, a cross-border initiative to intercept illicit contraband. It’s possible, that setting the table for the renegotiation of the USMCA deal is also likely part of his motivation. Additionally, it is likely that part of the end game is to encourage companies to onshore production. For instance, Honda is reportedly planning to move production of its Civic Hybrid from Mexico to Indiana to avoid tariffs.

The ongoing tariff situation has sparked debate about its potential long-term effects on the U.S. economy. While some argue that it may lead to the onshoring of businesses and production, its also very possible that suppliers might simply opt to move production to countries with cheaper labor and no tariffs, such as Vietnam, Cambodia, or Eastern Europe.

Suppliers have also expressed concerns about the challenges of shifting production, citing significant capital expenditures and worker shortages. This uncertainty is likely to continue, as Trump has shown a willingness to use tariffs as a negotiating tool to achieve his policy goals, particularly regarding border security and trade imbalances.

Trump's use of tariffs as leverage is a well-established tactic, employed to extract better deals from trading partners like China during his previous presidency. Securing natural resources, such as energy, lumber, and critical minerals, at preferential rates might be his ultimate goal. However, prolonged use of tariffs may lead to increased market volatility and negative impacts on asset markets and the economy, which are ultimately two measures he likes to point to as benchmarks of his presidency's success.

While Canada's government remains in prorogue, we hope the tariffs serve as a wake-up call for the next Prime Minister to unlock the competitive advantages of the country. Canada is rich in natural resources, boasting the third-largest oil reserves globally, and its strategic position allows for easy export to Europe and Asia from its east and west coasts respectively.

To regain competitiveness, Canada must focus on the following key areas:

• Diversify Economy: Canada relies heavily on natural resources and real estate, making it vulnerable to economic shocks. Shifting part of the focus to production and high-tech industries can drive growth and innovation.
• Invest in Strategic Infrastructure: Investing in transportation infrastructure, such as pipelines, ports, and rail networks, is critical to unlocking Canada's natural resources and exporting them to global markets. This will help Canada capitalize on its strategic position and resources.
• Diversify Trade Relations: Canada's heavy reliance on the U.S. market makes it vulnerable to trade tensions. Expanding trade relations with other countries, particularly in Asia and Europe, can help reduce this reliance and provide new opportunities for growth.‍
• Retain Talent: Canada's high cost of living and taxes have led to a “brain drain”, with many skilled professionals leaving the country. Implementing policies to retain talent, such as tax incentives or affordable housing initiatives, is crucial to driving innovation and economic growth.

In the meantime, the ongoing threats of tariffs will likely continue, leading to increased market volatility. Investors are encouraged to consult with their Q Wealth Portfolio Manager to establish a long-term strategic asset allocation tailored to their individual needs and risk tolerance. This personalized approach will help navigate the current market uncertainty and ensure that investment portfolios remain aligned with their overall financial objectives.

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Polymarket Odds that Trump will remove Tariffs before May

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Disclaimer

Quintessence Wealth, a registered Portfolio Manager in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, and Saskatchewan, an Investment Fund Manager in Newfoundland and Labrador, Ontario, and Quebec, and an Exempt Market Dealer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Quebec, and Saskatchewan. The Ontario Securities Commission (OSC) is the principal regulator for Quintessence Wealth.

The information contained in this document comes from sources we believe to be 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. The information contained herein may not apply to all types of investors. The opinions in this market outlook were prepared by Alfred Lee as of the date of this report and are subject to change without notice. It is based on various sources, believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are that of the author and do not necessarily reflect the opinion of Q Wealth as a firm. This report is not to be construed as an offer or solicitation to recommend Q Wealth products to clients.

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