Posted by John Doe
A few months ago, President Trump made an unexpected announcement that the United States would begin imposing a 25% tariff on all imported steel, along with a 10% tariff on all imported aluminum. The new taxes were implemented almost immediately.
Trade policy is one area in which Trump’s actions can never quite be predicted. The U.S. tariffs have been cited as a way of supporting United States-based aluminum and steel industries, which the president argues are important for the United States military. Theoretically, foreign competition could run domestic production out of business, which would degrade the United States industrial bases to the point where they cannot supply proper aluminum and steel to the military during wartime.
The Department of defence did counter Trump’s statement surprisingly quickly. They stated that the department has not found that foreign metal competition is a threat to the military’s ability to acquire the aluminum and steel that they need for national defence. The Department of defence also stated that the US tariffs might harm the country’s national security, because of their potential to damage relationships with United States’ allies.
In addition, the tariffs open multiple other U.S. industries to foreign competition by increasing the cost of production. The overall economic impact is this: While it sounds like a good idea, the tariffs actually hurt national security, hurt American industries, and hurt the allies of the United States.
What does this mean for Canada?
Canada is one of the allies for whom the tariffs have direct negative consequences. Canadian industry sells a larger portion of aluminum and steel to the United States market than to any other market in the world. You might have thought China would be the top contender, but they’re only number four in aluminum — and not even in the top ten for steel.
At the same time, the amount of steel that the Canadian industry buys from the United States is equivalent to two billion dollars more than the amount that the country sells. In the United States, there are less than two hundred thousand jobs within the aluminum and steel industries. While the tariffs protect these jobs, they do so at the cost of six million jobs, which rely on the ability to buy aluminum and steel cheaply.
In 2002, the United States imposed a similar tariff on steel imports. The results were catastrophic — 200,000 jobs were lost in steel-reliant industries, which is more people than the entire steel industry employed at the time. Only 20 months after implementation, the tariff was repealed.
On a broader economic note, Canadian and United States supply chains are closely integrated. When prices rise in steel-dependent industries across the entire country, Canada is bound to feel the ripple effects. The people who will be hit the hardest are Americans and Canadians with a low income.
That’s not even starting on the response from foreign powers, who retaliated by imposing new industry tariffs against the United States. All of the swing states who handed President Trump the presidency depend heavily on Canadian exports, so a Canadian tariff would be devastating to them.
What does all of this mean for mortgage rates?
The Bank of Canada (BoC) is moving cautiously regarding trade uncertainty. The new tariffs have added another layer of uncertainty to an already unstable situation. The BoC might actually cut rates rather than raising them, especially if a political trade contest is started between the United States and Canada.
After President Trump imposed the tariff, the bond yields for the Government of Canada saw an immediate and sharp drop. Market investors are having a hard time reconciling the economically unstable tariffs with the impact they’ll inevitably have on inflation.
As long as the tariffs continue to be imposed, the BoC is likely to keep mortgage rates stagnant or to decrease them. Rate increases are unlikely in a time of economic uncertainty and insecurity — it’s during periods of economic growth that the Bank tends to encourage higher rates.
In the short term, the tariffs also put pressure on the bond yields of the BoC. These bond yields are what fixed mortgage rates are priced around.
The Impact on Mortgages, Condensed
The short version is this: The new tariffs are a colossally unwise idea that is plunging both the United States and Canadian economies into uncertainty at best, and chaos at worst. Insofar as this means people are paying lower rates for their mortgages, this is a good thing. Insofar as the big picture of economic instability and job loss is concerned, it’s not great.
Trump’s tariffs are already having and will continue to have the following impacts on the United States:
- Relationships with close allies are strained due to the economic tension
- Prices of aluminum and steel are skyrocketing, which puts the six million steel-dependent industry jobs in the country at risk
- 140,000 aluminum and steel industry jobs are protected
- Retaliatory tariffs are being made by international countries, starting trade wars which increases prices across multiple industries
- Inflation of certain products is an uncontrolled problem
And these are the impacts on Canadians:
- The BoC has been forced to abandon its previous plans for rate increases due to the economic instability and uncertainty
- The BoC has seen its bond yields depreciate on a significant level, affecting fixed mortgage rates
- The aluminum and steel industries have lost or been fined for the use of a huge market
- Economic instability and job insecurity is reaching record highs due to inflation combined with decreased trade
All this for a justification that, according to the Department of Defence, doesn’t even make sense. It’s puzzling. The question is: Is President Trump so desperate for approval that he’ll plunge the economy into chaos and risk six million jobs just to hear the cheers from his supporters?
The answer appears to be a resounding yes.