The trade dispute between the US and Canada has escalated to a comprehensive level
Both countries have intensified tariffs and imposed import bans on each other, worsening the bilateral trade friction and disrupting the North American industrial chain.
The vicious cycle of the U.S.-Canada trade war has taken shape.
On September 8th, the trade friction between the U.S. and Canada reached a new round of escalation. Both sides successively introduced sanctions measures, breaking the previous expectation of easing negotiations. The U.S. officially announced a new import ban, which will come into effect on September 29th, completely blocking Canadian dairy products, alcoholic beverages and motorcycles from entering the U.S. market.
The U.S. had already taken the initiative to challenge, by imposing a 50% high tariff on $200 billion worth of Canadian goods. All bilateral rounds of trade negotiations ended in failure. Then Canada immediately introduced an equivalent retaliatory policy, which took effect at midnight on Tuesday to counter the tariffs, covering hundreds of categories of U.S. steel, furniture, electronics, clothing, etc., with tariff rates ranging from 15% to 50%.
The implementation of category-specific sanctions has led to fluctuations in agricultural and industrial commodity futures.
This round of sanctions covers a wide range of categories and corresponds to multiple commodity futures varieties. The agricultural sector was the first to be affected. Canadian dairy products and alcoholic beverages were banned by the U.S. side, and the supply chain of North American dairy products and beverages was forced to be restructured. The normal cross-border supply of goods was disrupted, and the supply of local dairy products in the U.S. tightened, driving the short-term strength of related agricultural commodity futures.
Industrial commodity futures have also been impacted. Canada's counter-tariff measures mainly target U.S. steel and aluminum products, paper, furniture, etc., industrial goods. The North American manufacturing industry chain is highly integrated, and Canada is an important export market for U.S. steel and aluminum, paper products. After the tariff increase, the export of related industrial products by the U.S. was blocked, the pressure of inventory accumulation increased, and the upward space for industrial commodity futures prices was suppressed.
Futures of the automotive industry chain have become the core risk point in the market. The U.S. previously explicitly stated that from January 1 next year, the tariffs on imported Canadian cars, trucks and components would be raised from 25% to 50%. Some foreign enterprises have begun to actively adjust their production capacity layout to avoid trade risks. The capacity relocation actions by the industry will be priced in the futures market in advance, changing the medium- and long-term supply and demand expectations of related categories.
Trade frictions have dampened economic expectations and put pressure on the Canadian dollar exchange rate.
Trade with the United States is very important for Canada's economy, with nearly 70% of exports for the United States market. Tariff barriers and import bans will directly affect the volume of Canadian exports, slowing down the country's economic growth. The rise of trade frictions has increased downward pressure on the Canadian economy, and the market may cut the possibility of the Bank of Canada tightening monetary policy.
The tariffs are currently having a less significant impact on U.S. domestic inflation, and the Fed's monetary policy adjustment has been relatively stable. The gap between U.S. and Canadian monetary policies has widened, thus pushing up the futures price of the U.S. dollar against the Canadian dollar. Bilateral trade officials still maintain communication, and there is a possibility of subsequent negotiations to ease tensions. This uncertainty has kept the Canadian dollar exchange rate in a high-oscillation state. As long as trade sanctions do not undergo substantive relaxation, the rebound space for the Canadian dollar will continue to be limited.
The USMCA deal has not come without its challenges.
The USMCA is the rules for free trade in North America that has lasted the test of decades. It also forms an important reference for pricing North American goods and currency futures. This new wave of broad trade sanctions has shaken the stability of the deal. Markets worry the agreement may be hard to keep working in the future. In past years, most goods Canada sold to the United States qualified for tax breaks under USMCA. This year, the United States used old trade laws to add tariffs, skipping the exemption rules written in the agreement. For investors, the main danger is not these tariffs taking effect right away. The bigger worry is a worsening cycle of trade conflicts. If both sides keep ramping up sanctions, North America's supply chains will stay messy and unstable.