Tariffs - "If You Loved Me, You Would Take Out The Trash"

The Real Estate Espresso Podcast

Tariffs – “If You Loved Me, You Would Take Out The Trash”

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Tariffs – “If You Loved Me, You Would Take Out The Trash”

Welcome to the Real Estate Espresso podcast – your morning shot of what’s new in the world of real estate investing. I am your host Victor Menasce. On today’s show, we’re examining the implications of a full-scale trade war and what it could mean.

The White House executive order was issued this past weekend and it follows a structure that I find familiar. It’s similar to an argument between spouses, where one says to the other, “If you loved me, you would take out the trash,” and then spends ages arguing about the trash instead of the core issue – feeling unloved. This is a primitive but well-known negotiating technique – linking unrelated items together. In this case, what’s the argument really about? Is it about the trash, or whether you really love me?

I’ve read the executive order thoroughly, so let’s start with Canada. The argument here is the considerable trade deficit between the U.S. and Canada, since Canada exports more to the U.S. than it imports. That’s accurate, but Canada exports about 4 million barrels of oil to the U.S daily, which the U.S. needs to power its economy. The U.S. isn’t energy self-sufficient despite many claims to the contrary. And in fact, the U.S. needs heavy crude oil from Canada (or Russia or Venezuela) to blend with its shale-extracted light sweet crude.

It appears that the U.S. is picking a fight with Canada, the very country supplying the heavy crude oil needed to run its economy. That crude oil produces diesel fuel, which powers business, construction, and commercial transportation. Adding a duty to oil means higher costs across the U.S. economy.

The Trade War

Now, both Canada and Mexico impose retaliatory duties on U.S. imports. Canada has imposed a tit-for-tat 25% duty on $155 billion worth of U.S. goods. If we exclude oil from the balance of trade, the U.S. has a trade surplus with Canada. I don’t have a crystal ball, nobody does, but my prediction for the outcome of this so-called trade war is a negotiation where the U.S. demands concessions from Canada.

The U.S. contributes more than its fair share to the defense of NATO countries. Canada and many European countries are vastly underspending on defense compared with pledges made in the NATO treaty. The U.S. is also seeking greater commitment from Canada and Mexico when it comes to border security. In my opinion, both Canada and Mexico have made a strategic error by transforming this negotiation into a full-scale trade war.

What does this mean for real estate investors?

If tariffs become a protracted negotiation, it could mean a significant change in exchange rates between Canada and the U.S. This will affect real estate developers in Canada who source mechanical systems and appliances from the U.S. Furthermore, U.S. investors will face higher lumber prices.

In the end, the tariff is not about trade. It’s about border security, as is clear from the text of the executive order. The real question for all involved is: whether it’s about whether you love me or taking out the trash? Have an awesome rest of your day.