Tariffs, trade wars, and your money

Trade Wars

Here in Canada, our economy is closely tied to that of the United States. For many years before the current U.S. administration, relations between the 2 countries have been, despite a few bumps, quite smooth and amicable. Unfortunately, this doesn’t sit well with President Trump, who is of the belief that the United States is getting hurt in the current trade deals, and therefore, his goal is to renegotiate the current deals to make them more favourable to the U.S.

As an example, one tariff put into place earlier in the year was on all steel entering the U.S. As American/Canadian economic relations have declined, so too have diplomatic relations. Just recently, we heard reports from the UN meeting that Donald Trump says the U.S. is not getting along with Canada. Other reports say that the current administration is also considering putting tariffs on the auto industry, much to the chagrin of both countries citizens.

Why is the trade war happening?

To answer this question, we need to first look at tariffs and the effect they have on the economy as a whole. Some people may think that tariffs are unequivocally bad, but Canada also has tariffs on many foreign goods. One particular example is dairy. Canada has a tariff of roughly ~270% on all dairy entering the country. This obviously draws the ire of dairy farmers in the U.S., because it means it’s tougher for them to compete in the Canadian market. On the flip side, Canadian dairy farmers are very happy to have the tariff in place because it protects the Canadian dairy industry. With less competition, they can keep their prices higher and stay profitable.

Basically, it comes down to each countries’ governments protecting the interests of their own people. This is just one of the points of contention in the recent trade discussions between Canada and the U.S. President Trump specifically pointed to the dairy tariffs as an example of how Americans need to retaliate, lest they suffer in trade negotiations, hence the trade war. To understand how it will affect our investments, we need to look at the greater picture.

How will it affect the investment market?

Let’s look at the dairy trade between the 2 countries. In 2017, Canada exported $162 million worth of dairy to the U.S., whereas the U.S. exported $636 million worth of dairy to Canada. Evidently, despite these tariffs, Canada still buys much more American dairy products than the other way around. And at the same time, there is the added benefit that Canadian dairy farmers are protected, and aren’t driven out of business.

Dairy Farm

These sound like large numbers, but how much trade happens between U.S. and Canada annually? $680 billion. Realistically speaking, the dairy trade is around 0.1% of trade between the 2 countries. Furthermore, the proposed tariffs talked about so far still remain a very, very small portion of our countries’ economies. To give some context, the American GDP in 2017 was 20 trillion. Economist Paul Krugman estimated that the total affect any recession could have on the world GDP, if any, would be around 2-3%.

So, what does it mean for me and my investments?

With this kind of uncertainly in the air, it’s natural that there will be fear when it comes to money, specifically investing. Know that, for most people, the best strategy when it comes to investment is to buy and hold, rather than try to time and play with the market. Even the best investors in the world–the teams with highly educated professional analysts and managers, can’t always reliably predict the market. By investing over a long period of time, and contributing consistently, you’ll be able to weather market fluctuations and stick to your own financial plan. Do this, rather than trying to time the market and risking your hard-earned money.

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