Deals activity in Canada in the second Trump era

We expect one of the first actions of President Trump will be to severely limit immigration and act on illegal immigrants who already reside in the United States. We believe this will lead to a significant reduction of labour supply, mainly in the manufacturing, retail, agriculture, construction and health care services, which will likely raise the cost of doing business in those sectors. Some of those illegal immigrants may cross the border to Canada.

Another step President Trump will likely take shortly after his inauguration is to impose tariffs of 10% on some countries and a much higher tariff on China of up to 60%. We believe Canada will be exempted, given the Canada-United States-Mexico Agreement (CUSMA). However, we do believe a plausible scenario could include the following:

• Targeted tariffs on various Canadian goods under Section 232 of the US Trade Expansion Act. This section provides the president the power to adjust imports, including using tariffs, if it’s found that excessive imports are a threat to US national security. We note that President Trump used this section in his previous term against steel imports. If such tariffs are imposed on Canada, there’s a period of at least 60 days during which the United States and Canada would seek to negotiate an appropriate way forward. We note that the first 2.6 million vehicles Canada exports to the United States are fully exempt from this section.
  
• We expect that during 2025, Trump will use his ability to terminate CUSMA as a bargaining chip to obtain concessions from Canada ahead of the renegotiation of CUSMA scheduled for 2026. In that context, it should be noted that Canada’s top non-resource exports to the United States are all in the manufacturing sector, including vehicles, machinery, plastics, electrical equipment and aluminum.

Trump and the Republican party don’t see the fight against climate change as a priority. As such, we expect a Trump administration will work with the two houses to dilute or in some cases terminate legislation aimed at fighting climate change. For example, Trump has proposed rolling back several environmental regulations, including those related to emissions and coal ash cleanup. His campaign has also suggested reducing the powers of the Environmental Protection Agency (EPA) and its budget.

While we don’t believe a Trump administration will revoke the Inflation Reduction Act, it is likely to dilute it, especially as it relates to electric vehicle (EV), EV battery, renewable energy, public transit and pollution controls. For example, it’s likely a Trump administration will roll back some or all of the tax credits available to US consumers when they purchase an EV that meets certain North American content rules. A less likely scenario, but not out of the realm of possibilities, would involve changes to the content rules that will disadvantage Canada and Mexico, while maintaining tax credits for US-produced EVs. 

While we saw record levels of oil and gas production under the Biden administration, we expect Trump will aim to further enhance production by removing more regulatory barriers and opening additional areas for drilling. We also expect a Trump administration will be interested in enhancing oil and gas trade with Canada through increased production and new pipelines going north-south.

While Trump and the Republican party have promoted their intention to cut income tax, Trump is on record that he will not touch the big spending items of Medicare, social security and defence. Thus, we don’t expect major tax cuts, and this will likely increase deficit and debt in a manner that could negatively affect the US global financial position. However, a Trump administration will almost certainly extend the personal tax cuts instituted in his first term, which are set to expire in 2025. We note that Trump is toying with the idea of income tax cuts that would be financed with increased tariffs, but since this would require very large tariffs, we raise doubts about the success of such policy.

A Trump administration helped by Republican control of the two houses is expected to turn the United States more inward. This suggests commitment to the North Atlantic Treaty Organization (NATO) might decline, forcing other NATO countries to increase funding and activity levels. Canada will likely find itself under tremendous pressure to increase its defence budget substantially and co-operate with the United States more closely in developing continental supply chains that decouple the United States from China (e.g. expedite the exploration and mining of critical minerals).