Tariff Terror - revolving chaos of Trumps erratic negotiations

Predictability

President Trump’s erratic style of chaos and destabilization is playing out with his largest global trading partners. Application of Canadian tariffs, initiated, paused and renegotiated as anticipated with all the bilateral carnage one would expect.

Donald Trump 2.0 has, again, presented his predictable method of negotiating proven useful throughout his volatile career.  The opening foray is a hard punch to the face. While the opponent is stunned, there may be a quick gut punch and generally opponents capitulate to end the assault. This is how negotiation played out in Columbias 24-hour negotiation, and now with both Canada and Mexico. Open hard to gain concessions.

The fragility of the Canadian governments is a perceived weakness which may be the motivation to hit fast and firm. This process is not so much a negotiation as a rolling capitulation to demands, and we will need resolve through the negotiations. Unsurprisingly, the process cannot endure as it will only results in ‘assured mutual destruction’. But the threat is not yet subsided, just paused.

Aim

The challenge of negotiating with Donald Trump is the opaqueness of his aim. It’s unlikely he really wants Canada as a 51st state unless as a subservient territory. Empirically he can’t really care about the openness of our boarder, as migrants will flow to Canada and away from the US, and we are not a material importer of guns or drugs. Our market is too small to be much interest to US banks who already have an option for tier 2 status. Is having a foreign country monitor the US boarder really a good strategy to preserve and protect the integrity of the US?

Negotiators need to understand the end game and it is bigger than North America. The theatrics are a show of strength, hit your best friends first then really batter your true adversaries. Does he want to renegotiate energy pricing as our country has been negligent in diversifying to other export countries. Is it military investment he is seeking? In this geopolitical fractured world this is something we do need to increase our investment here. Maybe this is a gentle start to renegotiating his USMCA as he successfully watered down our NAFTA agreement last term.

Is his goal to create enough instability that stock market profit/ earnings ratios come down, they are historically high; maybe he needs a forced retracement so he can take credit for market improvement during his term.

Most likely his objective is something we don’t anticipate, like access to our vast water reserves or eliminating supply management, or a free round of golf at our Island courses. Hard to gauge, only he would know the end game.

This barrage will not last long. Canada showing a strong, united and forceful response is exactly what we should do. He has already sized up our leadership, he may not expect but will respect strong resolve as response. Canada does have a good position if we have the fortitude to withstand near term impacts. The consequences multiply each day this it remains unresolved and as soon as Trump can declare a victory it will be over. For now.

Impact

Impacts are severe and swift. Anticipated consequences occurred at the signing of this executive order last weekend. Our dollar dropped to the lowest level in over twenty years. Stock market indices around the globe pulled back. Job losses initiated as proactive companies anticipate the effect. The Bank of Canada may have to reduce interest more than telegraphed to combat an economic constriction and weakness in the labour pool. The base case was a recession for Canada, something we have limited recent memory of – but this was stayed at the 11th hour.

Island Response 

The value of our exports to the United States was approximately $2.3 billion in 2023, estimated to be over twenty per cent of our provincial GDP. Two of our primary industries, fisheries and agriculture, are under duress as their product is perishable. From winter mussel harvesting to spring lobster fisheries and planting season, tariffs will ripple through these markets and communities reliant on these sectors. 

Aerospace, manufacturing, food production and biopharma would be slowing production as they await clarity on the duration of the trade dispute. The longer the dispute, the more challenging the restart – which is exactly what Trump wants, US consumers sourcing local options.

Tourism may be a pyrrhic victor. As our dollar retreats. The cost-benefit of northern travel for most Americans becomes more compelling. The growth of much needed tourism dollars to PEI is welcome but comes with its own set of challenges as operators will struggle to locate a workforce to accommodate what could be a measurable increase in travel. 

A more serious concern is our provinces lack of fiscal capacity to respond to existential threats.

With uniquely unregulated deficit spending, even exceeding forecast by thirty per cent, our province does not have the capacity to accommodate significant issues, this strengthens Trumps position as our economic ‘powder’ is gone nationally and provincially.

Government is left with two options: tax more or spend less. The only taxable constituent is business and seeking ‘more’ imposition on this constituent in a period as fragile as the current environment will result in less businesses to tax. 

The more practical approach is to ‘stop the compulsion of spending’, the most vulnerable target for government will be employees. An investment that has ballooned under this administration. As example Education, Healthcare and post-secondary institutions invest seventy percent of their operational budget to salaries, (I would be increasingly uncomfortable if I was as recent hire in the public service). The United States and Canadian federal departments have already started a dramatic purge of employees.

The great risk of the United States’ bully tactics is a global recession, the opportunity is for Canada to forge new relationships and trade pacts, speed is governments kryptonite and moving at the pace of business and not the pace of bureaucracy as the country consider difficult new paths. A small victory from this experience so far is a much-needed resurgence of patriotism and we may need to become much more self-reliant on provincial counterparts than ever before.