How Much Would The Trade Dispute Cost Canada?

July 2nd, 2018

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This blog post was originally published on the blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

Image Credit:Norenko Andrey/

At the beginning of every month, I brief members on how MoneyGeek's Regular portfolios have performed and comment on the state of the financial markets. In this update, Ill also talk about the potential impact that the latest trade disputes could have on the Canadian economy.

June Performance of Regular Portfolios

The performance of MoneyGeek's Regular portfolios for the month of June 2018 were as follows:

Last Month

Last 12 Months

Since Apr 2013

















Very Conservative




I've chosen to list below the performance of some of our competitors. For the sake of brevity, I've decided to show only those portfolios that have a similar risk profile to MoneyGeek's Regular Aggressive portfolio.

Last Month

Last 12 Months

Since Apr 2013

RBC Select Aggressive Growth




TD Comfort Aggressive Growth




CIBC Managed Aggressive Growth




Canadian Couch Potato Aggressive




In contrast with our competitors, MoneyGeeks Regular portfolios employ stocks/ETFs that follow the value investing strategy (QVAL, IVAL and BRK-B), and also allocate a larger percentage of the portfolios toward Canadian oil and gas stocks (XEG.TO) and gold (CGL-C.TO). If you would like to take a look at our portfolios, I invite you to sign up for our free membership.

In June, Regular portfolios performed about as well as our competitors. XEG.TO outperformed as oil prices climbed again, but BRK-B underperformed the US stock market.

Exchange rate fluctuations had a significant impact on the performance of our portfolios and on that of our competitors last month. At the end of May, one could exchange each US dollar for 1.296 Canadian dollars. By the end of June, however, that ratio had gone up to 1.313, which meant that the Canadian dollar weakened.

The exchange rates moved in reaction to Trumps threats to place tariffs on Canadian exports to the US. On May 31, the administration announced 25% tariffs on Canadian steel, and 10% tariffs on Canadian aluminum. After Canada retaliated by placing its own tariffs on US goods, the Trump administration threatened to impose another set of tariffs on Canadian vehicles.

So how serious are the consequences of those tariffs? Let me show you my back of the envelope estimate.

First, lets calculate how many jobs Canada could lose as a result of the steel and aluminum tariffs. Currently, the Canadian steel and aluminum industries employ about 30,000 people, and they export about half of all production to the US. It may thus be fair to say that about 15,000 jobs depend on exports to the US.

Its unclear by how much the new tariffs will affect exports. US customers may not be able to find replacements quickly, in which case theyll continue to source Canadian steel and aluminium. US companies could erect new factories to source their own steel and aluminum in the long term, but the tariffs may not be big enough to cement that decision.

Lacking a clear crystal ball, we have to make do with a guess. For the sake of argument, lets assume that Canadian steel and aluminum exports fall by 50%, and the number of people employed falls commensurately (i.e. 50%). If so, then about 7,500 people (50% of 15,000) may lose their jobs as a result of the tariffs over the long term.

Unfortunately, the effect of the tariffs doesnt end there. When a person loses his job, the person stops spending as much as he used to. Since all spending is someone elses income, the drop in spending results in a drop in other companies incomes, which leads to more job losses. This effect is called the employment multiplier.

According to one source, the employment multiplier for the primary metals industry is 3.7, which means that for every steel and aluminum job lost, 3.7 other people lose their jobs. So if 7,500 steel and aluminum workers lose their jobs, about 28,000 other people would also lose their jobs, for a total jobs lost of 35,500.

Now, 35,500 jobs lost, while a big number, is absorbable by the rest of the Canadian economy. To put this number in context, the Canadian economy created roughly 300,000 jobs per year in the last two years. Unfortunately, the matter becomes more serious with potential auto sector job losses.

As of 2016, somewhere between 120,000 and 140,000 people worked in the Canadian automotive industry. Over 75% of vehicles produced get exported, with substantially all exports going to the US. We could thus estimate that some 100,000 jobs (roughly 75% of 140,000) are linked to exporting vehicles to the US.

If the Trump administration slaps tariffs on Canadian auto, and if the number of jobs linked to exporting cars goes down by 50%, then some 50,000 auto workers could lose their jobs. Unfortunately, auto manufacturing also has a very high employment multiplier, which some estimate to be between 7 and 9. Assuming a multiplier of 8, the total number of jobs lost could reach 450,000.

Losing 450,000 jobs might be enough to put the economy in recession. Theres historically a strong correlation between unemployment and economic growth, and this chart implies that an unemployment uptick of 2.5% (losing 450,000 jobs would increase unemployment by this much) would put GDP growth down close to 0.

Now, I should warn you that my calculations are very rough, so I could easily be wrong about the actual consequences of the tariffs. For example, if 20% (and not 50% as Ive assumed) of Canadians in the steel, aluminum and auto industries lose their jobs instead, then the total number of jobs lost could end up being closer to 200,000. Such rosier assumptions may have led TD to estimate fewer job losses as a result of the auto tariffs.

Also, I dont believe that the job losses will come immediately. In order to replace Canadian products, US companies would need time to build factories and train workers. Such processes take multiple years.

Still, I believe the threat to our economy from the new tariffs are real, and Im personally not sanguine about it.

This blog post was originally published on the blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

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