Just when US trade partners thought it was safe to come out from their hiding places, along comes President Donald Trump to slap a punitive duty on Canada, America’s long-time ally and neighbour — imposing tariffs of up to 24 per cent on imports on its softwood lumber.
The new president seemed to have gone quiet on his protectionist instincts, pulling back from a trade confrontation with China and praising the US trade relationship with Canada when he met Canadian prime minister Justin Trudeau in February.
“Markets had been lulled into a false sense of security after Trump’s retreating from harsh China rhetoric and broader legislative failures,” says Peter Rosenstreich, forex strategist at the online bank Swissquote.
Investors have duly taken note. The Canadian dollar, aka the “loonie”, dropped 1 per cent to its lowest level in four months against its US counterpart. The Mexican dollar, another neighbour with much to lose from US protectionism, has fallen 1.8 per cent since the start of the week, having this year recovered much of its post-election losses.
The peso is the best-performing major currency in 2017, gaining 9.6 per cent — while the Canadian dollar is down 1 per cent on the year so far.
For all his legislative problems, Mr Trump’s executive action demonstrated “the ease in which he can enact punitive trade policy”, Mr Rosenstreich points out.
Are these the first shots in the trade war feared by markets? Logs, pulpwood and other forestry products make up only 0.2 per cent as a proportion of total Canadian exports, says RBC Capital Markets.
The size of tariff came in at the lower end of RBC analysts’ expectations and, together with as yet unannounced anti-dumping duties, will not be confirmed until January.
But investors are less concerned about the specifics of these duties as what they signal.
A warning from commerce secretary Wilbur Ross about Canada’s treatment of US dairy exports is adding market worry that protectionism is firmly back on the White House agenda, amplified by a Trump tweet on Tuesday when he asserted: “Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!”
US-Canada relations “seemed hunky-dory for a while”, says Stephen Gallo, at Bank of Montreal. “But the administration has clearly been looking through the fine print of some of these practices and they are asking why they are happening.”
The loonie has largely kept out of trouble since Mr Trump’s election. The US dollar fell at the start of February to around C$1.30, its lowest since September, such was the low-risk premium investors attached to possible trade disputes.
Relative stability in the price of oil, Canada’s big export product and noises from the Bank of Canada about bringing forward rate hikes have also kept the loonie buoyant.
But the currency has now dropped to C$1.36, and analysts expect it to tilt lower.
“The latest developments will heighten concerns that trade relations between the US and Canada could be more disrupted than initially expected, thereby increasing downside risks to our forecasts for the loonie,” says Derek Halpenny at MUFG.
Although the loonie looks cheap, the Canadian economy is not exactly “charging forward”, according to Société Générale’s Kit Juckes, so “this latest move has a strong chance of seeing a break higher towards C$1.40”.
But there are reasons for investors to pause before rushing out of the loonie in anticipation of a major trade bust-up.
With Mr Trump’s much-criticised presidency about to hit the 100 days mark, he may be “desperate to show some oomph”, says Mr Gallo, rather than embark on a long trade war.
US-Canada lumber trade disputes have been contentious for years, according to analysts at TD Securities.
These latest developments “appear to be more of posturing and enforcement of the Trump administration’s campaign promises than an escalation in trade tensions”, they say, as well as a “litmus test” for determining the scope of tweaking the North American Free Trade Agreement.
Greg Anderson, head of forex strategy at Bank of Montreal, tends to agree. “I would view this as a warm-up salvo ahead of Nafta renegotiation talks, and perhaps a tactic to induce Canada to want to start Nafta talks right away, rather than something that is going to seriously impact the trade balance of either country,” he says.
If anything is going to weigh on the loonie, it is going to be Canadian inflation, the oil price and policy divergence between the BoC — which is unlikely to move rates for another 12 months — and the Federal Reserve, which is set to push rates higher before the year is out. A row about lumber may seem small-fry in comparison.