The Trump presidency is in its infancy and already has rattled most global citizens, regardless of their political persuasion. The threat of tariffs in North America is particularly destabilizing, given the degree of trade between these two great nations. Enough have commented on the absurdity of the oft-stated rationale (Fentanyl) and how counter-productive tariffs would be for both economies, particularly in the auto industry, but broadly for all. I have some ‘small p’ predictions, but they are just that. I do want to share a bit of perspective on how to balance short and long-term thinking in this time of uncertainty, and how to come through it stronger. In a way it is more challenging to predict financial fortunes over the next year than it was during the early days of Covid and the great financial crisis. In those periods it was quite obvious that we were going to be screwed for a while, that governments would work to unscrew us (with varying degrees of success), and that we had to exercise austerity and caution to manage through until it was clear that troubled times were over. In this case it is not clear how bad it will get and for how long. The tariff can has already been kicked down the road for a month twice, potential rates have changed, and exclusions are circulating.
Trump and his attack dog Lutnick are bracing for battle
- Trump has had stated protectionist views for a long time
- Tax cuts will be expensive and government budget cuts will likely not be plentiful enough to fund them, so tariffs can help
- Politicians need to create wins to boast about and Trump would benefit from an ability to notch a win here, even a small one
- Lastly and probably most importantly, they recognize the leverage they have from a pure business perspective, especially when you add the fact that Trump is prepared to drive a lot of harm to his own people to get what he wants
Team Canada is stronger than it was a month or two ago
- Most of us are heartened to see the back of Trudeau, who was a financial lightweight, and to see his replacement enter the fray, who is quite the opposite. And party preference aside I think most would agree Carney would run circles around his current opponent in anything requiring IQ, especially a complex trade negotiation. His early posturing with Trump and messaging has been encouraging, for whatever that is worth
- The unity of most of our premiers has been encouraging, as has been the upsurge in patriotism and bravado. Other than the feckless Gretzky, the smarmy O’Leary and Redneck-in-chief Smith, we have come together quite nicely. Doug Ford may not be a mental giant, but he is saying and doing the right things, and that is all we need
- We have a bit of leverage with energy (oil and electricity both) as long we are really prepared to use it
- We are doing the right things in building closer ties to Europe, but that really won’t help much in terms of leverage or actual impact, at least not in the short term
- Nothing can replace the leverage that our biggest customer has on one of its important trading partners. Our population knows there will be some pain, and they are anxious
So North American businesses have a lot of unanswered questions: Which goods will get hit the worst? Any services? How will my business be impacted? For how long? Can I buy a business if my ability to predict EBIDTA is less than normal? What plan should I put in place to provide my business and its employees some stability? It’s hard. Here is some food for thought:
- Plan for a recession. The uncertainty created will continue to rattle consumer spending and business investment. Central bankers will do their jobs to the extent of their ability, but it will be hard to completely avoid a slowdown, which I am sure the data will soon confirm has already begun. If tariffs happen in the worst form, so many businesses and industries will be affected that it is impossible not to have a significant knock-on impact everywhere. Businesses survive recessions and good businesses use them to come out stronger: tighten up spending, cull the bottom tier of talent, inject urgency into the others and do a lot of other great things that will outlast the troublesome period. Business sectors have relatively different recession exposure so it wouldn’t be productive here to get into the range of specific actions to take. For some sectors recessions create boom times. For some players (in any industry) with cash and courage, recessions are good times to out-invest competitors or buy the weak ones
- Create three short-term tariff plans: a) it is all bluster and not much will happen b) it will happen in some form and will impact net pricing and volume for goods that cross the border c) holy shit. For what it’s worth I am betting on scenario B+ but leaning my preparation toward B-. The tariff plans can be similar to recession plans in terms of predicting volume drops and managing expenses to stem the bleed. But they also may include sucking up a margin hit to maintain share, sourcing goods in ways that minimize tariffs, shifting production between plants on both sides of the border, and a few more.
- Create a long-term tariff plan. You can’t build a new plant in Alabama or Saskatchewan in the next six weeks but maybe you can in the next 18 months, and it may have other benefits you didn’t consider without doing the analysis. Each business will have a complex set of factors that will determine the impact of a different supply chain in a non-tariff world (yes, SATOV can help 😉) but it is healthy to figure out how different the business will look with a different footprint
- Manage relationships for the long term. This to me is maybe the most important. About half of Americans supported Trump but a small subset of those support tariffs. My Republican clients may like some things about Trump but given that they own businesses, they think this is all pretty stupid. When North America goes back to the days of great trade-friendly leaders (think Reagan and Mulroney) you will need to remind your friends how wonderfully we have gotten along for most of our shared history. You have to do what you have to do to survive but you also have to do it in a way that supports the long term.
My own business has been quite resilient over previous times of uncertainty, despite the stress they caused. Clients reduce consulting spend, and deal activity goes down, but someone always needs help with something. We are lean and nimble, so we will be fine. I am not panicking; this too shall pass.
For the record, I am a proud Canadian who studied in the US and has worked more in the US over the last 25 years than I have here in Canada. Racine, Wisconsin has more relevance to my career than either Toronto or Montreal. The majority of my clients are either US businesses or Canadian funds that buy them. The last tranche is Canadian businesses that depend on US customers. So I carry a bias on this issue, but one that is shared by millions of Canadians. We love to denote some cultural differences with our neighbours and complain about the only three Canadian jokes they seem to know and all repeat (how many times can we pretend that ‘oot and aboot’ is funny, for one ), but we get along great and if we have traveled a bit we will take what Americans give over what comes from anywhere else. What Trump and his henchmen are unlikely to do is forever change the fact that we are the world’s two mast natural trading partners and best friends.