Tariffs & Trade Wars
The Trump administration will certainly impose tariffs on the USA’s trade partners, as it was both a center of its policy in his first mandate and an often repeated campaign promise.
Most relevant will be the tariffs on China, but also the USA’s two largest trade partners, Mexico and Canada.
Source: EV Magazine
The goal of these tariffs is to boost “made in America” manufacturing and also to be used as leverage in other diplomatic negotiations. As such, the Mexico and Canada tariffs are rather different than tariffs with China and Europe.
Tariffs targeting overseas countries will likely be mostly geopolitical tools, linking them to complex negotiations involving the position of European countries and China in regard to NATO, Russia, Israel, Iran, etc.
The tariffs with Mexico and Canada will be a lot more linked to domestic concerns, from border control (migrants to drug trafficking) to energy policies. Currently, the consensus is that the most likely scenario is a broad 25% tariff, which will necessarily involve a broad retaliatory response.
“On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders.
Thousands of people are pouring through Mexico and Canada, bringing Crime and Drugs at levels never seen before.”
Donald Trump
While this could be beneficial for some domestic producers, other companies are likely to suffer from this, and investors should be aware of the risk before the beginning of the new Trump presidency.
The most daring investors might even be tempted to build more complex strategies involving shorting stocks suffering from the tariffs, although this is likely best done only by experienced professionals.
How Tariff Works?
The way tariff works is by adding an extra tax, and therefore costs, to any products manufactured in the targeted country. Tariffs can be designed to target only some product classes, like for example automobiles or wine, or the broader economy and everything manufactured or produced in a given country.
This generally has several impacts:
- Changing the calculus of where it is best to produce, depending on where the final consumers are, usually the goal of tariffs like the one envisioned by Donald Trump.
- Retaliation by similar tariffs on the other way, often done to reduce the economic damage as well as political posturing and diplomatic leverage in later negotiations (“you remove your tariffs, we remove ours”).
- A reduction in total trade, as now both-ways tariffs impede cross-border trade.
- Bypassing mechanisms, like for example how a lot of Chinese exporters got “rebranded” as Vietnamese or Mexican exports during the first Trump administration.
- It can also accelerate inflation, as previously cheaper options for final products or components in the supply chain need now to be replaced with more expensive ones.
Overall, tariffs were very important in the mercantilist era of the 19th century but progressively were phased out post-WW2 to reach a low point recently. This trend might be reversing.
Source: Pew Research
Affected Mexican Companies & Sectors
Automakers
In the past decades, Mexico has become the prime destination for automotive manufacturing, with a special focus on exports to the US. Mexico was the 2nd largest exporter of passenger vehicles into the US and the first of heavy-duty trucks.
It also exported plenty of parts for the US factories (#1 in exports to the US) and is overall the world’s 4th largest manufacturer of automotive parts.
This was driven by a lighter regulatory environment, weaker unions, as well as cheaper salaries. And of course calculated upon the basis of tariff-free import of the cars into the USA, relying on the NAFTA (North American Free Trade Agreement) treaty, now USMCA.
The major automotive companies the most likely to be impacted by these tariffs are Ford (F -0.96%), General Motors (GM -1.39%), and Stellantis (STLA +1.45%) (which own among others the Chrysler, Jeep, Dodge, and RAM brands). On average, they would suffer a $3,000 extra cost per car.
Source: Yahoo Finance
In particular, GM has 34.9% of its US sales produced in Mexico. The Japanese Honda (HMC +0.31%), which sends 80% of its Mexican production to the US market, would be affected as well.
John Deere
During his campaign, Donald Trump threatened John Deere with a 200 percent tariff should he win the election, and it opted to export manufacturing to Mexico. And the company has indeed cut jobs in Iowa while building a new factory in Mexico.
Still, the company management denies moving production to Mexico and professes its “commitment to US manufacturing”, something that might not be enough to fully convince Trump and his team. And even more than with automotive, the tractor company offshore production is a very big target for rural Americans that form the base of Trump voters demographic.
Carrier
In 2016, the HVAC manufacturer Carrier became the center of a controversy about moving its factories to Mexico. This led to a deal with Trump back then to keep at least some of the factory jobs in the US.
In the long run, this seems to have mostly delayed but not stopped the move, largely driven by the massive price differential in workers’ salaries.
In 2023, Carrier opened its 8th factory in Mexico, making it one of the largest HVAC operations in the world.
As Trump is likely to remember what he will see as a “broken promise”, Carrier could become during the second Trump presidency a center of controversy regarding manufacturing policies once again.
Mexican Industrial REITs
REITs (Real Estate Investment Trusts) are a way to invest in real estate through a more liquid instrument than direct ownership.
In the past few years, Mexican industrial REITs, specialized in owning manufacturing and logistical facilities, have been a great investment, benefiting from factories moving into the country. A major driver was American or Chinese companies moving manufacturing to Mexico, while still benefiting from access to the US market.
The equivalent of a US REIT in Mexico is called a FIBRA, usually listed on the Mexican Stock Exchange. This includes companies like Fibra Prologis (FBBPF), Fibra Nova (FNOVA17.MX), or Terrafina (CBAOF) for example.
Affected Canadian Companies & Sectors
As Canada is a high-income country, its exports to the US are less focused on manufacturing offshore using cheap labor, and more on commodities abundant in Canada, especially the ones difficult to export overseas.
Large US exports to Canada could also be affected negatively by tariffs, especially if this escalates into a full-fledged trade war.
Canadian Oil
Despite the US being a massive oil producer, Canada provides roughly 20% of the oil used stateside. This is especially true for oil consumed in inland regions like the Great Lakes, Midwest, and the Rockies.
As a result, gas prices could shoot up 30 to 40 cents a gallon, and potentially up to 70 cents, within as little as two days after the tariffs take effect.
Patrick De Haan, an analyst at Gas Buddy
By far, this is Canada’s largest export to the USA, standing at $128.51B in 2023.
In parallel, Canadian oil has very few other possible export markets, as transport infrastructures are not developed enough to carry it all overseas. So, broad tariffs could suddenly make Canadian oil a lot less competitive, potentially forcing producers to reduce production.
The top 5 largest Canadian oil & gas companies are:
- Cenovus Energy (CVE +0.51%)
- Suncor Energy (SU +0.25%)
- Imperial Oil (IMO -0.68%)
- Enbridge (ENB +0.56%)
- Canadian Natural Resources (CNQ +1.31%)
It should also be noted that Donald Trump’s domestic energy policy has been underscored by the phrase “drill baby, drill!”, referring to maximizing US oil production. This could have a double negative effect on Canadian oil to reduce the need for US oil imports and depress global oil prices.
Canadian Timber
Almost all Canadian timber exports were aiming for the USA ($17.2B), with its second export market a lot smaller (Japan – $1.12B).
This could cause Canadian timber exports to suffer greatly from tariffs, potentially making them uncompetitive against US domestic production.
The top 3 largest Canadian timber companies are:
- West Fraser Timber (WFG +0.21%)
- Suncor Energy Inc. (CFPZF -3.97%)
- Imperial Oil Ltd. (STLJF -1.07%)
US Automakers
Already hit by the threat on their Mexico factories, automakers could also suffer in case Canada enacts retaliatory tariffs on US car imports.
These cars sent to Canada make up almost a fifth of the $362.9B worth of Canadian imports from the USA. For example, Chevrolet, a GM brand, was the top-selling brand in Canada in the summer of 2024.
Likelihood Of Tariffs
Tariffs during Trump’s presidency are likely, as they were already used as an international policy tool during his first term as president.
However, we also know that Trump will likely use positions like the 25% tariffs on Canada and Mexico as a starting point for negotiations. If these countries give in on something else Trump wants, like closing the border to migrants, we could see the tariffs decreased or some product classes exempted.
At the same time, if targeted countries retaliate or other topics fail to be agreed upon in the direction the US wants, tariffs could be escalated further. This creates a lot of incertitude for investors, who will need to navigate these risks and determine if they are priced in properly in individual companies’ stocks.
Conclusion
Broad tariffs on all imports from the two largest trade partners of the USA are likely to reshape the countries’ economies if they are enacted. There is still a limited chance that this is mostly a negotiation tactic and that the final tariff will be smaller or centered only around specific industries.
In any case, investors should take note and anticipate the risks of the tariffs being here to stay, forcing changes from the decades-long trend of moving manufacturing to the USA’s neighbors and overseas.
