By Michael O’Neill

Trump fired tariff shots, but the Loonie dodged the bullet—for now.  The Canadian dollar is battered, bruised, but unbowed, following President Trump’s latest tariff barrage.

On April 2, the American president did what he does best: wreak havoc. He slapped a minimum 10% tariff on imports from sixty countries. China got hit with a blistering 54% combined levy, while the EU got off “light” with a 20% hit.

Canada Gets a Breather, Not a Break

Canadians breathed a sigh of relief. Trump’s tariff salvo did not apply to Canada. That’s because he had already slapped levies on steel, aluminum, potash, and lumber, all of which were covered under the existing United States-Mexico Agreement on Trade, which he signed on January 29, 2020. However, it is merely a respite, not a reprieve.

A Nostalgic Plan for a Bygone Era

President Trump has a plan. His objective is clear: revive U.S. manufacturing and reduce America’s trade deficits, particularly with nations like Japan, Germany, and South Korea. He wants to strong-arm foreign manufacturers to build cars in America, or else their vehicles will face huge tariffs when imported into America.

The poor man is delusional—perhaps it’s just a senior moment—but he has clearly forgotten that foreign automobile demand soared, and the manufacturers prospered because Americans turned their backs on Detroit. Spoiler alert: it wasn’t because the cars were too good.

Welcome to the Junkers

From the 1960s through the early 1990s, American auto manufacturing  industry became a case study in dysfunction. Endless union strikes tanked production and morale, while bloated wages, ballooning benefits, and pension obligations made innovation unaffordable.

The result? Outdated assembly lines, poor quality, and cars that drove like lawnmowers with windshield wipers.  The traditional assembly line approach, already under pressure from inefficiencies, was compounded by these labor-related expenses, resulting in outdated manufacturing processes and lagging quality control.  

It became known as the “malaise era” in automotive circles. It was the period roughly from the early 1970s to the early 1980s, characterized by declining quality, poor product design, and a general industry downturn as it struggled to adapt to new challenges.

American (and Canadian) consumers voted with their wallets and by the early ’80s they were snapping up Japanese and German-made vehicles, which earned a reputation for engineering precision and durability.

The Fly in the Ointment

Trump’s auto industry plan is flawed. The average hourly wage for a vehicle assembly line worker in Mexico is (as per The Wall Street Journal) between $3.50 and $4.50 per hour, compared to $44/hour in the U.S. and $33.00/hour in Canada. Moving production to the US guarantees higher prices for vehicles.

Furthermore, the tariffs will reduce the supply of U.S. vehicles and squeeze out the supply of cheaper foreign made cars. It will also empower the United Auto Workers (UAW) union who may revert to its 1970s labour/management playbook. Reduced competition from lower-wage jurisdictions like Mexico or Asia improves the union’s leverage. With fewer low-cost foreign options to threaten outsourcing, labor has more bargaining power to demand a bigger share of profits. That may lead to “Malaise Era: The Sequel,” which doesn’t bode well for the consumer.

Carney Didn’t Get The Memo

Canadians are just as exposed, and that may be evident far sooner than you think. U.S. Commerce Secretary Howard Lutnik parrots every Trump utterance like it is an original thought. He warned that any country that retaliates against the tariffs will face even more pain.

Canada’s interim Prime Minister Mark Carney didn’t get the memo. On Thursday afternoon, he announced 25% tariffs on all vehicles that are not compliant with the USMCA, as well as tariffs on non-Canadian content of any USMCA-compliant vehicles from the U.S., except for Mexico.

“That’s Personal”

It is no secret that Mr. Trump reacts negatively whenever he thinks he has been insulted, ignored, or challenged. Why would anyone think that Trump won’t react to Carney’s perceived trade war escalation?

Flight of the Loonie

USDCAD sank like a stone in the wake of the tariffs as investors bailed out of U.S. stocks and U.S. dollars. The sell-off was due to sharply narrowing CAD/U.S. 10-year interest rate spreads. They were -155 at the beginning of February and are now -111. The key driver was the steep fall in the U.S. 10-year Treasury yield due to a mix of safe-haven demand and the sharply rising risk of a U.S. recession thanks to Trump’s actions. A U.S. recession is even worse news for Canada due to the massive trade relationship (even with tariffs), which increases the peril for Canada’s already weak economic growth. Its hard to imagine the Loonie rising further in that environment.

Loonie Rally May Pause

The elevated recession risk and the high odds that Trump reacts badly to Carney’s tariff retaliation suggest that the 1.3960-1.4020 area may be the low for USDCAD in the short term.

The Loonie maybe battered, bruised and unbroken-for now, but the Trump administration may be back to finish the job.