Canada Will Win the Trade War

Why Trump's Tariffs Could Become a Bonanza for Canadian Stocks

The stock market has a peculiar habit of panicking first and thinking later. When Donald Trump threatens tariffs, he is expecting investors to see red. Trump thinks they will sell Canadian stocks, punish exporters, and rush toward Trump's perceived safety of American investments. He thinks that the headlines will announce economic doom for Canada, analysts will lower their forecasts, and commentators begin explaining why Canada is too dependent on the United States to survive a prolonged trade dispute.

But what if Trump is an absolute moron?

And what if the moron is overlooking something rather important?

Canada sells things the world actually needs. America sells many things the world wants. Those are not necessarily the same thing.

Canada possesses enormous reserves of oil, natural gas, uranium, potash, copper, gold and other critical minerals. It produces timber, aluminum, wheat, canola and other agricultural commodities. It has substantial hydroelectric resources, a highly educated workforce, and industries capable of supplying the materials needed for energy production, infrastructure, manufacturing and modern technology.

These are not fashionable consumer products that people abandon when the latest trend changes. They are the raw materials of industrial civilization.

The United States can impose tariffs on Canadian aluminum, but it cannot repeal the periodic table. It can tax Canadian oil, but it cannot make its refineries magically compatible with every alternative supply. It can threaten Canadian lumber, but it cannot build houses out of political speeches that remind people of Hitler rallies.

And therein lies the opportunity for Canadian investors, and indeed international investors.

The initial panic will create buying opportunities

The first stage of a trade war is likely to be ugly. Canadian manufacturers that depend on American customers will face higher costs, disrupted contracts and uncertainty about future orders. Automotive production, steel, aluminum and forestry businesses could experience declining profits. Some companies will delay investment, reduce production or lay off workers.

The Canadian dollar could also weaken, particularly if investors fear that tariffs will damage economic growth.

Yet a falling currency has a second side. Canadian exporters selling commodities internationally may find their products more competitive when revenues are converted back into Canadian dollars. Companies earning American dollars while paying many of their costs in Canadian dollars could receive a financial cushion.

This does not mean every Canadian exporter will benefit. Tariffs, transportation expenses and declining demand can overwhelm currency advantages. Nevertheless, investors who indiscriminately sell Canadian shares may create opportunities in companies whose underlying products remain in demand.

The market will eventually have to distinguish between businesses that are genuinely damaged and businesses that have merely become unpopular.

Canada's resources are its bargaining chips

Consider the industries that will matter most.

Energy: The world needs reliable supplies of oil and natural gas. Canadian energy producers, pipeline operators and natural gas infrastructure businesses could benefit from growing demand outside the American market, provided they have the transportation capacity and contracts to reach those customers.

Critical minerals: Copper is essential for electrical infrastructure, uranium for nuclear power, and lithium, nickel and other minerals for various energy and industrial technologies. Canada cannot automatically replace every global supplier, but it has resources that countries seeking secure supply chains have good reason to pursue.

Agriculture and fertilizers: Canada is a major supplier of wheat, canola and potash. Countries need food regardless of which politician is threatening whom this week. Potash, in particular, is an important agricultural input, and farmers cannot indefinitely substitute political goodwill for fertilizer.

Forestry and building materials: American tariffs may hurt Canadian lumber producers in the short term. But housing demand does not disappear because a border dispute has made timber more expensive. The longer the disruption lasts, the greater the incentive for Canadian producers to find customers elsewhere, although new markets will take time to develop.

Precious metals: Gold has historically attracted investors during periods of financial and geopolitical uncertainty. Canadian gold producers could receive support if demand for gold rises, though their profitability will still depend on production costs, ore quality and the gold price.

Canada's advantage is not that every one of these industries will prosper immediately. It is that the country has a diversified collection of resources for which international demand is likely to persist.

The rest of the world is waiting for an opportunity

The biggest strategic mistake would be to assume that Canadian businesses have no alternative to the American market.

For decades, proximity and established supply chains have made the United States Canada's natural trading partner. That relationship will remain enormously important. Building new pipelines, shipping infrastructure, distribution networks and commercial relationships is expensive and takes years.

But tariffs change the calculations.

If Canadian producers become less competitive in the United States, they have a stronger incentive to pursue customers in Europe, Japan, South Korea, India and other markets. Those customers, meanwhile, have an incentive to diversify their own sources of supply rather than depend too heavily on one country.

This creates a feedback loop. Canadian businesses invest in new export routes, foreign customers establish new purchasing relationships, and alternative supply chains become more viable. Once those relationships exist, they do not necessarily disappear when political relations with Washington improve.

Trump may intend to make Canada more dependent on American goodwill. He could instead accelerate Canada's efforts to become less dependent on American customers.

That would be an extraordinary unintended consequence.

What Canadian stocks could do

The Toronto Stock Exchange has an important characteristic that investors should not overlook: it contains substantial exposure to financial services, energy, mining and other resource industries.

That composition means the TSX will not necessarily behave like a technology-heavy American stock index during a major market rotation.

If investors become concerned that American technology companies have been valued too optimistically, or that enormous AI infrastructure investments will not generate sufficient profits, capital could rotate toward companies with tangible assets, established revenue and products that customers already purchase.

Canadian energy producers, miners, pipeline operators and selected financial institutions could attract renewed attention. Gold producers might benefit from higher gold prices, while agricultural suppliers could benefit from continued global demand for food and fertilizer.

There are important qualifications. Banks can suffer if unemployment rises and borrowers default. Miners can lose money when commodity prices fall. Energy companies can be hurt by weaker global growth. A trade war can damage the entire economy, including companies that never export a single product to the United States.

Nevertheless, the Canadian market offers investors exposure to a different collection of economic drivers. That diversification could prove valuable if American investors have concentrated too heavily on a narrow group of technology giants.

The predictions investors should watch

At the beginning of this dispute, I would make five predictions.

First, Canadian exports will gradually diversify away from the United States. The process will be uneven, expensive and frustrating, but tariffs will give Canadian businesses a powerful reason to pursue other customers.

Second, demand for Canadian natural resources will help cushion the damage. Energy, gold, copper, uranium, agricultural commodities and potash will remain strategically important even if individual sectors experience temporary downturns.

Third, the initial reaction in Canadian stocks will be more pessimistic than the eventual economic reality warrants. Investors often treat uncertainty as if the worst possible outcome has already occurred. Some companies will deserve their lower valuations, but others will be punished indiscriminately.

Fourth, the trade war will encourage Canada to build economic relationships that survive beyond the dispute itself. New customers, new export routes and new investment partnerships will gradually reduce the leverage Washington obtains from Canada's dependence on the American market.

Fifth, Canadian stocks could outperform expectations over the longer term, particularly in resource-heavy sectors. This does not guarantee that the TSX will rise, or that it will outperform American indexes in every period. It means that the case for Canadian investments will increasingly depend on global demand for real products rather than on the political relationship with a single customer.

The final irony of Trump's stupidity

There is a temptation to interpret a trade war as a contest in which the larger economy automatically wins. That is certainly Trump's thinking, but the orange clown is hardly known for his forward thinking.

The United States has a much larger domestic market, greater financial resources and enormous economic influence. Those are the advantages Trump is relying upon, but, as usual, Trump tends to forget that the rest of the world exists.

Size is not the same as self-sufficiency, and economic power does not eliminate the need for suppliers.

A country can be wealthy enough to impose tariffs and still discover that the tariffs make essential materials more expensive for its own industries. American manufacturers may ultimately find themselves paying more for inputs, American consumers may face higher prices, and American businesses may have to reorganize supply chains that worked perfectly well before politicians intervened.

Canada will face its own costs. Some Canadian industries will suffer badly, and some workers will pay a heavy price. Declaring victory before those costs are understood would be foolish.

Yet Canada has something that cannot be defeated by a presidential executive order: a large endowment of natural resources, productive capacity and access to markets beyond its southern border.

If Canada responds by expanding trade, improving infrastructure, attracting investment and making its industries more competitive, the trade war could become a turning point rather than a catastrophe.

The most important investment lesson is that markets can confuse a temporary political crisis with permanent economic decline.

Canada does not need to defeat the United States at everything. It needs to become indispensable to enough of the world that no single country can dictate its economic future.

And if investors sell Canadian resource companies simply because a trade war has made them nervous, the eventual winners may be those willing to look past the headlines and ask a more basic question:

Who still needs what Canada produces?

The answer, in many cases, will be: Practically everyone.

 

 

October Update

Canada is winning the Trade War. Everything I predicted has come true. And soon Trump will face the midterms, which may eventually mean he is ousted from power. The trade war won't last long if the Democrats put an end to it after they gain power.

The only way Trump can stay in power is if he rigs the midterms.