Let’s get one thing clear from the outset. We cannot win a trade war with the United States. We can impose all the retaliatory tariffs we like. We can boycott American products until our wallets scream. The U.S. won’t even notice.
Sure, a few companies may experience sales declines and some folks may be laid off. But in the grand scheme of the American economy, it will be about as much nuisance as a pesky fly.
In a report earlier this month, the C.D. Howe Institute looked at two scenarios. The first was potential impact of a 10-per-cent tariff imposed by the U.S. on all goods and services. The second projected the economic impact of Canadian retaliation, where Canada implements a similar 10-per-cent tariff on U.S. goods and services in response.
In the first case, the likely effect would be a reduction in Canadian GDP of 0.9 per cent. That would be bad but not disastrous.
In the second scenario, which would see Canada hitting back with similar tariffs, the result is much worse. Our national GDP would fall by 2 per cent, according to the report. Since our GDP is currently growing at an annual rate of 1.3 per cent, according to Statistics Canada (first-quarter results), a hit like that would tip us into recession.
Essentially what these numbers are telling us is that Canada should sit quietly by and let Donald Trump and his protectionist followers do their worst. To retaliate would only harm us, not them.
However, political realities make that impossible. Imagine how opposition politicians and the Canadian public would react if Prime Minister Justin Trudeau adopted a say-nothing, do-nothing approach to American trade provocations. His Liberal Party would disappear from the landscape the next time voters go to the polls.
That leaves the Prime Minister in a political bind. He has to stand up to U.S. President Donald Trump for the sake of his own image, self-esteem and political survival. But doing so, even in a mild way (“We won’t be pushed around”), enrages the thin-skinned President to the point that he threatens that Canadians will pay dearly for Mr. Trudeau’s comments.
Expect that to happen. Mr. Trump is a vindictive man when he feels his ego has been harmed. And he holds a grudge for a long time – he is still going after Hillary Clinton, for heaven’s sake.
So unless something unexpected happens, it appears we are faced with an escalating trade war we cannot win. If Mr. Trump follows through with his threat to slap tariffs on cars, it would really get ugly.
A reader wrote to ask what companies might be relatively immune from tariffs if things go from bad to worse. Here are three Canadian firms that might qualify, but let me preface this with a major caveat. If the trade war escalates to the point of recession, all companies will suffer, whether or not they are export-oriented. However, these may be less impacted than others.
CGI Group (GIB.A-T, GIB-N). Not even Mr. Trump is likely to figure out a way to put tariffs on knowledge, and that’s what Montreal-based CGI deals in. It is the fifth-largest independent information-technology and business consulting-services firm in the world. Its services include systems integration, IT outsourcing, data centres, cloud computing, internet security and more. The company employs about 73,000 professionals in offices and delivery centres across the Americas, Europe and the Asia-Pacific region. Annual revenues are $10.8-billion.
Second-quarter 2018 results (to March 31) continued to be strong. Revenue came in at $2.95-billion, a year-over-year increase of 4.9 per cent on constant currency basis. Net earnings were flat with the year before at $274.4-million but were better on a per-share basis, coming in at 94 cents (fully diluted) compared to 90 cents last year. This was due to a drop of about 12.6 million shares, thanks to the company’s aggressive buyback program.
CGI’s backlog at the end of the quarter was just over $22-billion, which is well distributed internationally. In terms of client geography, 28 per cent of the business comes from the U.S., 16 per cent from Canada, 15 per cent from France, 12 per cent from Britain, 7 per cent each from Finland and Sweden, and 15 per cent from the rest of the world.
Tariffs are not a direct threat to this business but they could have an indirect impact if clients have to cut budgets because of lagging sales. As I mentioned, no one is safe if economic growth slows.
WSP Global (WSP-T). WSP is an international engineering and design firm that provides a wide range of services, from urban planning to environmental remediation. Based in Montreal, the company employs approximately 43,000 people, including engineers, technicians, scientists, architects, planners, surveyors and environmental specialists, as well as other design, program and construction-management professionals. It has 550 offices across 40 countries, on five continents.
Here again, we have a knowledge-based company with a strong international presence that is not involved in a tariff-vulnerable business (although many of its clients may be). The company is growing at a steady rate, with first-quarter net revenue of almost $1.5-billion, up from $1.3-billion the year before. Net earnings were $49.7-million (48 cents per share, fully diluted), compared to $47.6-million (47 cents per share) the year before. Backlog at the end of the quarter was $6.7-billion, up 12.3 per cent from the same period in 2017.
A look at the distribution of the backlog illustrates the geographic diversity of the company’s business. The Canadian total is only 15.3 per cent while the Americas account for 35 per cent. Europe, the Middle East, India and Africa (EMEIA) make up 31.6 per cent while Asia-Pacific (APAC) is just over 18 per cent.
Algonquin Power and Utilities (AQN-T). A Canadian-based company that has almost all of its assets in the U.S. seems relatively safe from Mr. Trump’s tariff threats. The company provides rate-regulated natural gas, water, and electricity generation, transmission and distribution utility services to over 750,000 customers in the United States. It focuses on clean energy through its portfolio of wind, solar and hydroelectric generating facilities, representing more than 1,600 MW of installed capacity.
This is a smaller company than CGI or WSP and does not have their global reach. But the nature of its business, with what amounts to a captive client base, puts it in a relatively secure position in a trade war. The main potential area of vulnerability is that tariffs will drive up the cost of the materials used to expand its business.
First-quarter results showed a 17-per-cent increase in revenue to US$494.8-million (the company reports in U.S. dollars). Adjusted net earnings were US$141-million (32 cents per share), compared to US$66.5-million (19 cents per share) the year before. The directors approved a 10-per-cent dividend increase, which shows a high degree of confidence in the company’s future.
Here are other sectors that have little or no tariff exposure, but which could incur other types of risk in a trade war.
Banks. A sharp decline in business investment resulting from uncertainty over access to the U.S. market would hurt business. The CEO of Royal Bank has already voiced this concern. On another level, banks would face increased risks of mortgage default if unemployment rises because exporting companies scale back.
REITs. Real-estate investment trusts might appear at first glance to be sheltered from trade storms. But if those storms result in a recession, shops will shut down, offices close and manufacturers go out of business, leaving millions of square feet of vacant space.
Utilities. Most of their business is regulated and they have a stable clientele – we all need our electricity and natural gas even if the economy is in the dumps. However, these companies face potential tariff hits on the materials they import to build new facilities or maintain existing ones. In this case, higher costs would eventually be passed on to consumers.
About the only sector I can think of that bears little risk if the situation escalates is gold companies. No one is talking about tariffs on gold imports and the price of the metal is likely to rise if the economic situation worsens and investors seek safe havens.
But unless you’re in the gold business, a trade war will hurt almost every Canadian in some form or another. Based on Mr. Trump’s remarks, he’d be happy to see that happen. As far as he’s concerned, our Prime Minister said some disrespectful things about him, so he wants to punish us all as a result. He has the power to do just that.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to buildingwealth.ca.
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Gordon Pape