Canada is gearing up for a trade war which, in many ways, feels like an episode of Three Stooges starring Justin Trudeau (Moe), Jagmeet Singh (Curly) and Pierre Poilievre (Larry). With guest appearances by Ontario Premier Doug Ford, Alberta Premier Danielle Smith and Parti Quebecois leader Jean-François Lisée.
Picture the “leaders” in goose-lined jackets clustered around a whiteboard that has more scribbles than actual plans. And like any good Canadian comedy, there are more plot twists than there are… well, Greenlanders.
Prime Minister Justin Trudeau resigns. Jagmeet Singh will likely retire since his pension is now fully funded. Pierre Poilievre’s plan is to make sure people know that he has no plan because he is not the Prime Minister. Doug Ford calls an election seeking a mandate he already has. Danielle Smith ponders whether she could expense a membership to Mar-a-Lago and Jean-François Lisée thinks that Quebec would be in a better negotiating position if it worked with the rest of Canada rather than going it alone. Political gamesmanship really does make for interesting bedfellows!
We live in a country where complacency rules while facing down a partner who in his own words is “f..king crazy![1] ” That’s not a knock-on President Trump. Far from it! It is a wake-up call where we, as a sovereign nation, must recognize that the US has laid down a gauntlet that we must pick up.
There is the possibility that Trump’s objective is annexation into the US sphere as a 51st State. However, we think the end game will be much less intrusive. In our view, the worst-case (25% tariffs) threat is a negotiating tactic that will either lead to the so-called economic union, or more likely, as a strategy to wring out some concessions when re-negotiating the USMCA.
Points of contention include Canada’s digital sales tax, and the farmers supply management system that has been in place since the 1970s. You might recall that supply management was a sticking point during the re-negotiation of NAFTA. Trump ultimately signed that deal despite his reservations about supply management.
That does not diminish the seriousness of the issue, which is why we think of this in terms of strike three. Our current situation is not the first time we have been in this position. President Nixon used Tariffs to push for change in the Canada / US relationship (strike one). So did Trump 1.0 when he applied tariffs to aluminum and steel products being imported from Canada (strike two). What makes this time different is that Trump 2.0 has unleashed economic warfare which if he follows through with the 25% across-the-board nuclear option, would decimate the Canadian economy.
Any counter punch will require more than tit-for-tat tariffs. Resetting our domestic economy by jettisoning regulatory overreach and eliminating inter-provincial trade barriers would be a start. According to some economists, this toxic combination has the same negative impact on GDP as 15% across-the-board tariffs.
At Croft Financial Group (CFG), we have experienced firsthand the impact well-intentioned but disjointed regulation can have on a business. For CFG to operate across Canada, we must be licensed with regulators in ten Provinces and three Territories. These thirteen regulatory bodies are guided by the Canadian Securities Administrators (CSA) which is an umbrella organization of securities regulatory bodies from different provinces and territories. CSA is our version of the US Securities and Exchange Commission (SEC). However, unlike the SEC, the Canadian version recommends policy and guidelines for provincial regulators. It does not set policies.
To maintain those thirteen licenses, CFG employs law firms in each jurisdiction to represent us when updating our files with Regulators. A firm of our size can manage this red tape but for smaller firms, it is a significant barrier to entry that stifles competition on a national scale.
We are not alone. Truck drivers must finesse provincial regulations that include the tires used in their rigs, varying weight restrictions, protocols for the type of cargo being transported, and drive time conventions that require rest at specific intervals.
Why should an engineer in New Brunswick be required to get a license to operate in Nova Scotia? Why are there different provincial rules governing the medical profession? The list is endless!
The simple truth is that under the USMCA it is easier and less expensive to ship products to the US than it is to sell the same goods in Canada.
Energy is the poster child in this debate. Why do the eastern provinces import oil and natural gas from the US when Canada has excess capacity? Clearly it is time to get serious about the east-west pipeline that was shuttered in 2017. The pipeline must traverse entirely through Canadian territory to prevent potential shutdowns from foreign interests.
We cannot be threatened or feel protected by international conventions. Michigan Governor Gretchen Whitmer, a Democrat, has threatened to shut down the portion of the Enbridge pipeline that flows Alberta oil and natural gas through her State. How long before Trump plays that card in negotiations? The fact he has yet to do so may be his reluctance to play ball with a Democrat.
Changing the way that we do business in Canada will not be easy. But when facing the economic version of three strikes, Canada must think in terms of what is good for the country, not what appeases special interest groups.
Well intentioned environmentalists need to be heard. No one questions the value of taking precautions to limit risk to the environment. But those concerns must be weighed against the common good and shuttering a project is not an option.
The Onshoring Goalpost
Canadian business must think globally. We have an underused trade agreement with the European Union, and we need to embrace the Trans-Pacific Partnership (TPP) which is a free trade agreement between 12 countries in the Pacific Rim. Canada was built on trade, and the products which we export – critical minerals, liquified natural gas and oil – are in high demand.
Make no mistake, this is not a Trump paradigm that will end in four years. We are witnessing a sea change in the US that is all about onshoring. Trump has taken the position that the US will be stronger if it can enhance its manufacturing base. Trump’s recent meanderings center on the idea that companies can avoid tariffs by setting up shops in the US. Economists refer to this as onshoring. But is that goal realistic?
New manufacturing facilities take years to build and the cost of setting up US operations can be prohibitive. Finding workers will also be challenging given that the US economy is already at full employment and the immigration crackdown will remove available workers from the US labor pool.
That mindset is unfortunate because US labor is expensive and the cost of setting up or re-tooling factories is often prohibitive. In the short to medium term, as Ford CEO Jim Farley put it, “tariffs will blow a hole through the US auto industry.”
What investors need to understand is that the US is by any measure a service-based economy. More than 70% of US GDP comes from services that support tourism, movie and television production, sports and entertainment, software development, and consulting. If you doubt the importance of services, consider that both Presidential candidates promised to eliminate tax on tips.
We believe that President Trump recognizes these concerns which is likely why he has been kicking the tariff threat down the road.
The Fallacy of Trade Deficits
If we follow the money across the service sector, we can see how it distorts the trade picture. We suspect that if service exports were valued correctly, they would offset much of the US trade deficit from Canadian energy.
The Bureau of Economic Statistics values service exports using a combination of quarterly and unreliable annual surveys that include information from government and industry reports. That is very different from how end-product goods are priced through the Automated Export System.
According to the BEA, a “service export” is any service provided by a resident of one country to people or companies from another country, essentially meaning that a service is considered exported when it is delivered across international borders to a non-resident entity. This includes services like consulting, legal advice, marketing assistance, and telecommunications services.
Think about this disconnect in terms of say, a Disney movie. When films are exported their value is based on production costs, which do not account for the price paid by the end user. The difference can be significant. Especially if a substantial part of the movie was produced domestically in Canadian dollars.
The Scourge of Misinformation
None of this changes the dynamics that President Trump is espousing. At this point, the US population is swallowing false information.
A classic example is the banking sector. President Trump told reporters recently that he was angry that US banks are unable to operate in Canada. Experts were quick to point out his error since there is no such prohibition.
It is fair to say that the difficulties for foreign banks to enter and compete in Canada’s insulated banking market is challenging. As Ottawa prepares for a re-negotiation of the USMCA it is likely that Trump’s call to ease barriers to entry into banking could be the first salvo in a more sustained attack.
Canada’s financial services system is dominated by six big banks, and the bar for entry is high not only for foreign lenders, but for smaller Canadian challengers. The process of opening a new bank – requiring extensive approvals from government and regulatory officials – protects the stability of our financial system, but it comes with the added side effect of snuffing out competition.
Financial technology startups have long warned that regulatory barriers stifle digital innovation, allowing the major banks to keep an iron grip on their customers. In the past, foreign banks have tried to edge into the consumer banking business but left after struggling to gain enough market share to make the endeavor worthwhile.
Proponents of Canada’s banking system, meanwhile, attribute the sector’s global reputation for stability to the country’s tight regulatory environment and the concentration of power among a handful of immensely large banks with diversified business streams.
The country’s banking regulator has prioritized the safety and soundness of Canada’s financial system for a long time, which is why the application requirements are onerous. The key counter-punch in any trade negotiation is that the rules are the same for Canadian upstarts as they are for foreign entities.
U.S. lenders can and do operate in Canada, albeit at a smaller scale. In total, 16 US banks operate in Canada and hold a combined $113 billion in assets, making up half of all foreign bank assets, according to the Canadian Bankers Association.
While the regulatory process to open a bank in the US is like Canada’s system, RBC, TD and BMO have been able to establish significant businesses in the US, where the market is larger and more fragmented. We suspect that any re-negotiation of the USMCA will reset banking regulation in Canada by opening the competitive landscape.
Still the Big Six Canadian banks are the Big Six for a reason. Any change in the application process that comes out of a re-negotiation of the USMCA will not likely dent their fortress. Canadians have significant ties to their financial institutions and are reticent to switch loyalties. We experience that firsthand in the way we deal with new clients. For example, there has been a minimal uptake for National Bank’s suite of initiatives for clients within its independent wealth management network.
In short as Matthew Barret former CEO of Bank of Montreal put it, Canadians may not like their financial institution, but they do trust their bank. And that trust comes from a position of security that Canadian banks have provided since confederation and that allowed Canada to withstand the financial crisis relatively unscathed.
Analysts and industry experts attributed the resilience of Canadian banks to their size which is why the regulatory restrictions on largely untested new entrants have helped shield the financial system from failures and the contagion that could ensue.
That point of view has not been lost on US regulators that have at times proposed consolidating more than 4,000 banks in the US to fortify their financial system and prevent further failures.
Summary
If we are correct that Trump’s tariff threat and rhetoric about economic warfare are negotiating tactics, then we should think about it as a precursor to a reset of the USMCA. That does not change the magnitude of this economic game of chicken, nor does it change the fact, that Canada must reset its thinking on east west domestic alliances rather than north south partnerships. Defensive positioning must be at the forefront when facing a strike three pitch.
UNRAVELLING THE MAGA MIND
Ever feel like you are sitting next to the mad hatter where common sense takes a detour, sanity is off on holiday and “why” is always the question of the day? Are tariffs a means to bring countries in line on “thorn in your side” US issues like fentanyl trafficking and illegal immigration, or are they part of the playbook to muster support within the MAGA mind? Whatever the reason in Trump’s mind, sanity is overrated. We believe his tariff threats are deep-seated maneuvers that swap straight lines with zigzags and loop-de-loops to effectively warn off opposition forces.
Just one month into his Presidency the Trump Administration has threatened trade wars with allies and adversaries. The first salvo is Trump’s declaration of 25% tariffs on steel and 10% tariffs on aluminum imports with a March 12th deadline. Backstopped by explanations that blur economic and security goals.
This is clearly a strategy to gain leverage by keeping his opponents off balance. In Trump’s mind tariffs are a tool with which to pursue various goals at once. Never mind that the goals are often at odds with each other.
The challenge for money managers is the risk that such a disconnected approach can cause financial markets to miscalculate outcomes and exacerbate volatility. The trick is to get past the noise in search of themes that underpin the administration’s tariff threats and more importantly, how those policies will shape Canada’s long-term economic relationship with the US. Most striking is that unlike Trump’s first administration, tariffs have become an extension of – or substitute for – diplomacy.
When Colombia pushed back against U.S. efforts to deport migrants by military aircraft, Trump ordered a 25% tariff on the country. He reversed course hours later when Colombia softened its objections. We think the March 1st deadline for across-the-board tariffs on Canada and Mexico – separate from the latest tariff plans on steel and aluminum – follows the same line of reasoning.
We think tariffs are something that the administration will keep in its back pocket and use at any opportunity. Applying tariffs to combat migration and fentanyl is likely a precursor to force Canada to kickstart defense spending. The March 1st across-the-board tariff threat is likely a strategy to get Canada to reset its supply management policies, eliminate the digital services tax, and start re-negotiation of the USMCA.
We saw that firsthand during the confirmation hearings for the people who will be administering his trade agenda.
Jamieson Greer, Mr. Trump’s nominee for United States Trade Representative (USTR), said in his confirmation hearing that the USMCA review would start “right out the gate.” He suggested he would push for stricter North American content rules for auto production, target Canada’s digital services tax, and push for better market access for American farmers. “Sooner than later” as Greer is convinced that there is a short window to restructure the international trading system to better serve US interests.
Howard Lutnick, Trump’s pick for commerce secretary, put it bluntly in his confirmation hearing: “Canada treats our dairy farmers horribly. That’s got to end. If Canada is going to rely on America for its economic growth, how about you treat our farmers, our ranchers and our fishermen with respect.”
Robert Lighthizer, the architect of the original USMCA, spelled out one potential vision in a New York Times essay. “Countries with democratic governments and mostly free economies should come together and create a new trade regime. This system could enforce balance by having two tiers of tariffs,” Mr. Lighthizer wrote. A country outside the group would face higher tariffs, while those within it “would pay lower tariffs, and they could be adjusted over time to ensure balance.” While Lighthizer is not part of Trump 2.0’s trade team, his views are influential.
From our perspective, attacks on Canada are part of a broader push to remake the global trading system. The long-term objective is to improve US terms of trade by shifting supply chains away from China. Trump has so far walked back the spat with Canada and Mexico, but he slapped another 10% tariff on Chinese goods, ramping up the trade war he started in his first term.
From an economic perspective, tariff revenue could be used to finance tax cuts. The US wants to re-balance trade deficits which Trump sees as a scorecard for economic success, contrary to mainstream economic thinking. Tariffs are likely part of an onshoring strategy to encourage foreign companies to build factories in the MAGA centric rust belt.
The last two goals were evident when Trump hosted Japanese Prime Minister Shigeru Ishiba in Washington. At the joint press conference that followed, President Trump said he would raise tariffs on Japanese imports if the US/Japan trade deficit (about US $60 billion at last count), was not eliminated.
Despite the heated rhetoric, Trump seemed ready to cut a deal. He applauded Japan’s intentions to buy more liquefied natural gas from Alaska. He welcomed investment announcements in the US from Japanese firms SoftBank (the Stargate initiative), Toyota and Nippon Steel. Despite being prevented from acquiring US Steel Corp., the White House was willing to work with Nippon Steel’s updated investment plan for the company.
The other lever is “reciprocal” tariffs that will apply to “everybody.” He offered few details but hinted at a series of bilateral arrangements (note the recent meeting with Indian Prime Minister Modi), where the US would raise tariffs to match those of other countries, rather than implementing a 10% to 20% universal tariff, as promised during the election campaign.
As President Trump said at his joint press conference with Prime Minister Modi, “I think that’s the only fair way to do it, that way nobody is hurt. They charge us. We charge them. It’s the same thing. And I seem to be going in that line, as opposed to a flat-fee tariff.”
While shrinking America’s trade deficits and sucking in foreign investment are clear goals of MAGA trade policy, they demonstrate the downside of a loop-de-loop approach. Tariffs reduce imports but expand the inflow of capital. That means that a surge of investment will tend to increase, not decrease, the trade deficit.
It is not the only paradox in Trump’s policy mix. Trade wars reduce imports, which could hinder the use of tariff revenue to offset tax cuts. Likewise, the US dollar will rise in value when the country slaps tariffs on trade partners. That might help offset the inflationary impact of tariffs for American consumers, but it will make US exports less competitive in international markets.
A reduction in imports, a stronger US dollar and changes in the flow of capital are circular and will not mollify the US trade deficit. The root cause is internal. Trade imbalances are caused by a combination of consumers who would rather spend than save and massive fiscal deficits.
Imagine how Trump and his MAGA base will feel when he is unable to address the structural deficit while at the same time stoking inflation. Expanding tariffs will not change that trajectory.
IN SUPPORT OF BITCOIN’S MOMENTUM
As Bitcoin trades around US $100,000, it’s time to look under the hood to understand what’s driving this positive momentum. A principal factor is Trump’s promise to make the US ground zero for the crypto industry. The principal driver being his campaign promise to launch a strategic national crypto stockpile during his second term.
On a fundamental basis, the limited supply of Bitcoin and the concept of halving are also contributing factors. The supply of Bitcoin is fixed, with new BTC tokens entering the market every 10 minutes. At present, estimates suggest that there are 19,722,500 Bitcoins currently in circulation which means that 93.9% of the total Bitcoin supply has already been mined.
The term “Bitcoin Mining” is somewhat misleading. It is basically a process that creates new bitcoins by rewarding “miners” every time a new block of transactions is confirmed on a global ecosystem. Confirmation requires a miner using dedicated software to solve complex mathematical algorithms to create a secure ledger for global transactions on a decentralized ledger known as blockchain. This transaction network uses cryptography to ensure that data is tamper-evident and can’t be deleted or modified without network consensus.
Currently, miners receive 3.125 new Bitcoins for every new block of transactions. Previously, the reward was 6.25 Bitcoins and before that, 12.5, 25, and 50 Bitcoins respectively. The regular reduction in the number of Bitcoins rewarded to miners is referred to as “Bitcoin Halving,” which happens every 210,000 blocks, or about four years. This reduces the supply of new tokens over time, which supports the principal of limited supply.
The maximum number of Bitcoins that can be circulated is 21 million tokens. Based on halving cycles of 210,000 blocks, Bitcoin is expected to reach its maximum supply by 2140.
The limited supply is appealing to speculative investors. The most famous promoter of Bitcoin is Cathie Wood, founder, CEO, and Chief Investment Officer (CIO) of ARK Invest, an investment management firm based in St. Petersburg, Florida. She believes there is investment value in the limited supply proposition. If there is outsized demand for a product in limited supply, the price will invariably rise. Of course, this is predicated on the view that outsized demand will continue well into the future.
Blockchain is the value proposition in this process. Recording transactions on a decentralized platform provides a lower cost alternative to the global banking environment. Banks have had a monopoly on record transactions using centralized proprietary systems which have become significant profit centers for financial institutions.
While third-party platforms keep tabs on Bitcoin’s supply, seasoned investors prefer to do their own calculations. This removes the need to trust the information being provided by another source. To arrive at a well-thought-out calculation, it’s important to understand how the supply of Bitcoin is determined. That begins with an understanding of the Bitcoin mining system.
Supporting A Decentralized Network
One of the many unique features of Bitcoin is decentralization. This means that, unlike traditional currencies, the Bitcoin network is not controlled by a central bank or government.
Moreover, Bitcoin transactions don’t require third-party authorization. This is also in contrast to traditional currencies, which must go through banks and other intermediaries when being transferred.
Instead, Bitcoin transactions are verified by blockchain miners. To ensure that Bitcoin is an inclusive financial system, anyone can mine transactions.
The process requires miners to connect hardware to a device. The device will attempt to solve a cryptographic equation. The equation is so complex that only a specialist device can solve it.
It takes about 10 minutes on average for the equation to be solved. Bitcoin Mining Devices and Energy Consumption are expensive and consume a considerable amount of electricity.
For example, in 2021, the New York Times reported that Bitcoin mining uses more energy than entire countries. The same article states that the average household would require 9 years’ worth of energy supply (or $112,500) to mine a single Bitcoin block.
In the first five months of 2024, US miners consumed 20,822.62 GWh of electric power, costing over US $2.6 billion at the current average commercial electricity rate. That is enough electricity to charge every electric vehicle in the US 87.52 times or power 1,983,107 households for a year.
Although the Bitcoin mining system is inclusive, it is also competitive. The returns can be significant as miners, based on current prices, receive US $211,860 in new Bitcoin tokens for every series of blocks, which can happen every 10 minutes.
This huge incentivization is why Bitcoin miners are prepared to invest so much in the process. And, as more miners enter the market, this increases the difficulty of each cryptographic equation. In turn, only the most powerful Bitcoin mining rigs and those with access to cheap electricity have a realistic chance of being successful.
Ensuring Bitcoin Inflation Rates Can’t Be Manipulated
Investors should also understand the inflationary controls that underpin the mining strategy. It all comes down to a limited supply which is different from the way traditional currencies are disseminated. Central banks are free to print as much money as they wish.
For example, the US Federal Reserve printed over US $3 trillion worth of US dollars in 2020. This was in response to COVID-19 measures and amounted to almost one-fifth of the total supply. Similarly, in 2020, the Bank of England printed almost £500 billion throughout the pandemic while the European Central Bank minted about €1.85 trillion in new currency.
This trend is global. It matters because any increase in the amount of currency in circulation reduces its value. In a world of checks and balances, that impacts inflation, in the traditional sense. In the Bitcoin sphere, we see it in the price of a token. Assuming demand for Bitcoin remains constant.
How Does the Supply and Demand of Bitcoin Work?
The supply of Bitcoin is not determined by policymakers. Nor can it be manipulated by central banks or governments. Given the limited supply, value is determined by demand shifts in much the way as market forces determine the value of stocks, commodities, currencies, and other assets.
Historically, Bitcoin operates in prolonged bull and bear cycles. When Bitcoin rises in value over longer periods of time, this increases market sentiment. In turn, this motivates more people to buy Bitcoin, as price increases are attractive to investors. This is otherwise referred to as a fear of missing out (FOMO).
However, when Bitcoin enters a prolonged bear market, there are fewer people willing to buy it. This is because of continued declining prices. And when market prices drop rapidly, as it often does, people panic sell which exacerbates the price decline.
Bitcoin Halving Events
Bitcoin halving is an important event for investors to keep tabs on. When the Bitcoin mining reward is halved, this slows down the rate of Bitcoin inflation. This is because for each 10-minute block that is mined, 50% fewer tokens enter circulation.
Assuming constant demand, the upside potential can be significant. For example, the most recent Bitcoin halving took place in April 2024 when the mining reward was reduced from 6.25 BTC to 3.125 BTC. Since that took place, the price is up 35.7%, although part of that can be explained by Trump’s election.
Bitcoin was valued at $9,100 on May 11th, 2020 when the previous halving occurred, reducing the mining reward from 12.5 BTC to 6.25 BTC. Seventeen months later, Bitcoin peaked at over $68,000 — an increase of over 650%.
Similar events took place during the 2016 Bitcoin halving. On July 9th, 2016, Bitcoin was worth $662. Seventeen months later, Bitcoin peaked at a then-all-time high of $20,000. This amounts to post-halving gains of over 2,900%.
History suggests that demand for Bitcoin increases in response to the halving event. Because there is less Bitcoin entering the market, this has resulted in prolonged price appreciation. We will see if the trend continues after the April 2024 halving event.
Fundamental Conditions
Fundamental news also has an impact on the demand for Bitcoin. Consider how the markets reacted when the SEC approved Bitcoin ETFs on January 10, 2024. Spot Bitcoin ETFs showed significant inflows and record trading volumes.
On February 26, 2024, total trading volume for nine ETFs hit $2.4 billion, surpassing previous records. Institutions and retirement planners started including Bitcoin ETFs in investment funds and tax-sheltered plans. Retail investors followed institutional moves.
Another area that can influence the demand for Bitcoin is regulation. For example, if a country bans Bitcoin outright, this could reduce demand on a much broader scale. But if a major economy were to recognize the value of Bitcoin (like has happened in the US) demand would increase significantly.
The Case for Constant Demand
Investors also look at the Bitcoin trading markets to evaluate current demand levels. A good starting point is to look at daily trading volumes.
History suggests that when Bitcoin is in a bullish run, daily trading volumes increase, as more people buy Bitcoin. Conversely, when Bitcoin is in a bearish cycle, trading volume decreases. The rise in crypto ETFs has led to a surge in trading volumes.
Summary
Bitcoin should not be an investor’s primary investment strategy. It is a security that when added to a well-diversified portfolio has enhanced returns. We are not suggesting that this will continue but given the historical performance of this asset class after a halving process, it suggests that the current run in Bitcoin may be a sign of things to come.
Richard N Croft
[1] That was Trump’s response to a reporter who asked whether he would send in the navy should China attack Taiwan. It was his answer, which might be true, that China would never attack Taiwan while he is President because he is “F..king Crazy!”