As much as we talk about how we simply don’t know what Trump and his administration will do in the next hour, let alone tomorrow or the next week, a fairly predictable pattern has emerged. When faced with a news cycle that the White House doesn’t like (say, when military strike plans end up as a text message on a journalist’s phone), it immediately creates a new cycle.  This week, it was time for tariffs again and like the age-old clown trick of pulling scarves out of his mouth, the Trump administration pulled out a 25% tariff on all imported automobiles and some parts.  The implementation date – wait for it – is April 2nd. 

As with all other trade policies being cranked out of the Oval Office sausage grinder, this one is aimed at bolstering domestic manufacturing, since over half of all vehicles and parts sold in America are imported. Assuming no shift in consumption patterns, the tariffs are estimated to bring in over $100 billion in annual revenue. That is a big assumption since analysts have estimated that these tariffs could cause U.S. vehicle prices to rise anywhere from $3,000 to $6,000 per vehicle. In an environment of slowing employment growth and still elevated inflation, this type of price hit is going to put a dent in demand and hence spending. But, before we look at the macro angle from this week’s announcement, let’s see what the immediate market reaction has been.

As the above chart shows, North American automakers had actually seen their stock prices recover in recent weeks on the view that a full-blown tariff and trade war was going to be kicked down the road or taken off the road. In the case of Ford, shares had fallen down towards US$9 in early February on the first tariff threats but climbed back to around US$10.30 on Wednesday. By Thursday’s close, it was back below US$10. GM shares were below US$46 at the start of this month but rebounded to north of US$52 this week. The stock ended Thursday near US$47. Stellantis has been a major disappointment for investors since it peaked at over US$29 this time last year. And what looked like signs of a bottom in the stock this month now looks like a chance to break below its 2022 lows.

European producers weren’t spared either. This month’s recovery in BMW has hit a wall, while its German counterpart has seen an even larger decline even before this week’s tariff tantrum. Ferrari, which only recently introduced its first plug-in hybrid vehicle, has seen its share price shift into reverse all the way back to August levels. Some of this recent move, however, can be attributed to a negative effect from market volatility.

As for Asian producers, there is also going to be a hit. In fact, according to GlobalData, outside of Jaguar Land Rover (which is owned by Tata) and Geely (Volvo), Mazda has the highest percentage of cars sold in the U.S. that were imported (not produced in the states). Hyundai was the next in Asian carmakers at 65% and Toyota came in at 51%.

But let’s bring this back home. As much as manufacturing, and the auto sector in particular, have declined in terms of their relative shares of the economy over the past decades, they are still critical. Way over 100,000 individuals are employed in vehicle assembly and auto parts manufacturing in Canada and if we include aftermarket services and dealerships, that number rises to almost half a million. A large chunk of that is in Ontario. We also export more than $50 billion worth of vehicles to the U.S., but the supply chains are so deeply integrated that the production of a final product involves a cross-border shipment numerous times.

The above chart shows the stock prices of both Magna International and Linamar – Canada’s largest auto parts makers. Even though the main aim of Trump’s tariffs is on vehicles, investors have seen the writing on the wall in terms of second order effects on parts since he was elected.  Magna is now back to 2020 levels, though Linamar is holding above its 2022 lows.  If you recall, when Russia’s invasion of Ukraine started, this company demonstrated a European supply chain (as in bearings) that was able to withstand more of the direct impact of that event than on other suppliers.

At the time of writing, the federal and Ontario governments had not announced specific retaliatory measures, as opposed to the fairly rapid response to earlier tariff threats. This could mean that neither levels saw a high probability of an auto tariff being imposed given the considerable recoil ouch that the U.S. would feel on a hit to Canadian shipments. And this is where this will get interesting on the political level.

I have been telling clients for weeks now, since Elon’s DOGE class for underemployed millennial programmers got under way, that a grand assumption would be that all federal government employees in the U.S. voted democrat in the last election. Unfortunately, that isn’t a really good running assumption and recently announced job cuts are impacting some non-democrat individuals. As much as these latest auto tariffs are aimed at boosting domestic production, the reality is that you can’t just shift supply lines on a dime. Automakers on both sides will have to react (if these go on) with cost reduction measures, including staff. Do we care to make the same assumption as above?

So, here are the scenarios. First, the tariffs get walked back (yawn). Second, they remain and Washington doles out support monies to affected workers and employees (Iowa farmers take note), or the White House somehow crafts a message that the ensuing pain across households is worth it to achieve the long-term objective of boosting domestic manufacturing. The first option is easiest, which explains why it has been used the most so far. The second is tricky because somehow those tax cuts have to be paid for (or not). The third is intriguing. Some have opined that the Trump administration actually wouldn’t mind a near-term economic dislocation in the U.S. as history suggests that a recovery from such a setback could be engineered in a relatively short period of time – say before November 2028.

At the end of the day, we are in the same place that we have been in after all of the trade announcements since January. Nobody, including probably those in the White House, knows which policies will come, which will stick, and which will float away like a Tesla rebate. The auto tariff is the most significant of the trade-related salvos that have come out of the White House, but markets have responded in a more subdued manner than what we may have anticipated. The TSX, as shown above, is still trading in positive territory this year, supported by lower interest rates and yields, as well as a sense by investors that we could see a more pro-growth policy framework unfold after the upcoming federal election. Ally and I still see no need to make dramatic shifts from a tactical perspective and maintaining or reinforcing an asset, geographical and sector diversification strategy should still offer the most comfortable ride.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle