Deals activity in Canada in the second Trump era

Now that Donald Trump has emerged as the next president of the United States and the Republicans control the two houses, we want to share our thoughts about some of the key steps we expect a Trump administration will take and how they may impact Canada. 

To develop our thoughts, we’ve used our in-house platform that uses artificial intelligence (AI) to gather and analyze information continuously on global socio-economic and geopolitical trends from a large number of sources. Using this platform, we focused on six areas where we believe there’s a relatively high likelihood a Trump administration supported by a Republican majority in the two houses could lead to significant deviations from the policies of the Biden administration.

Immigration

We expect one of the first actions of President Trump will be to severely limit immigration and act on undocumented 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 undocumented immigrants may cross the border to Canada, with potential ramifications on the relationship between the two countries.

Trade policy

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 anticipate Canada may be exempted from such tariffs for products that qualify for duty-free status under the Canada-United States-Mexico Agreement (CUSMA). However, we do believe a plausible scenario could include the following:

• Targeted tariffs on various Canadian goods could be levied through executive order using different mechanisms, for example, 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 and aluminum 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.
• Softwood lumber, steel, aluminum and dairy products have been a sore point in United States-Canada trade relations, and we expect them to continue to be a focus of the new administration.

The fight against climate change

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 Congress 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 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.

Oil and gas policy

Despite the high levels of oil and gas production we saw 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.

Tax policy

While Trump and the Republican party have promoted their intention to reduce income tax, Trump is on record that he won’t touch the big spending items of Medicare, social security and defence. It’s likely that tax legislation will be passed in the upcoming year that will extend certain personal and corporate provisions that are otherwise set to expire in 2025. This could increase the national deficit and debt and have a negative impact on the US global financial position.

Trump has also advocated for an additional reduction in the corporate income tax rate for domestic manufacturers, a rollback of some of the clean energy incentives included in the Inflation Reduction Act and increased tariffs on foreign-made goods. However, it’s unclear whether he’ll be successful in implementing such policies due to a slim majority in Congress. Moreover, given the debt position of the United States, reducing taxes will be challenging, as it may lead to a financial crisis.

Foreign and defence 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).