A trade war has already begun

Trump has made very clear that he is not a fan of globalization and wants to renegotiate trade deals with various countries if he sees unfairness per his judgment. I’m not going to get into any political discussion here but such kind of action may trigger trade wars which could be damaging to both sides. If I ask you which country may be the most likely target for a trade war, you probably will never think about this one, Canada! Yes, believe or not, a trade war with Canada has already begun quietly. But for this war, Canada may probably be the one to blame first.

You all know that in 1994 Clinton has signed the NAFTA with Canada and Mexico for free trades. Trump really hates it and very quickly after he took the power, he signed an executive order to renegotiate NAFTA. While I’m not an expert in this area,  Canada may have actually abused this agreement for their unilateral benefits per the information I have seen. E.g. Canada has imposed nearly 300% tariff on US drywall and over 200% tariff on American eggs. Amazingly, while US has filed many trade complaints against Canada, it has not yet retaliated. Just a few days ago, Canada did it again and placed a tariff on ultra-filtered milk made in the US, which has caused outcry of the US dairy farmers. This time, Trump is not just sitting and watching. He openly called the Canadian trade practices a “disgrace”, “a trading disaster”. Now the US government has also announced to impose a tariff (24%) on the soft-lumber from Canada. I think this is likely just the beginning. The trade wall may get worse before better. No question that such kind of trade walls, if becoming serious enough, will hurt the underlying businesses for both sides but the question is which one may hurt more in this case? I think Canada will likely be the one that will suffer more in the long run. You see, Canada is really a small brother in terms of economy scale and it is heavily relying on the trades with the US, which is overwhelmingly larger economically. Logically if the trade war is escalating, the negative impact on the economy is likely more severe for Canada than the US if you ask me. By its own, Canada is facing some serious economic challenges, one of which is a very significant real estate bubble that may burst anytime probably in a similar scale to that seen in the US in 2008/2009.

I’m not sure Canada can go well in fighting with the US in the trade war. It appears the Canadian stock market has smelled something already and is showing a bearish head-shoulder pattern (see chart of the ETF for Canadian stocks, EWC). If you are long with the Canadian stocks, be careful. Aggressive traders may even consider to short it!