Technical: Automotive Industry and Trade

• Auto manufacturing makes up about 1% of Canadian gross domestic product (GDP) but is significantly higher when downstream industries included.

• Direct industry employment is about 130K; direct and indirect jobs estimated around 500K or 2.7% of Canada’s total employment of 18.6 million in May 2018.

• Canada would get hit hard by a 25% U.S. tariff, with Ontario getting the brunt of this. The collapse in Commodity prices over 2014-2015 would be a template for analysis, in that a big sector shock occurs in the midst of an economic expansion.

• This would put the Bank of Canada in easing mode and the C$ headed below 70 U.S. cents.

• Automotive supply chains in NAFTA are among the most tightly integrated in the world. It is not clear to me, or I think anyone else, how these would be impacted by such a tariff. The short-run impact could be a collapse in cross-border trade and production due to lack of clarity on how things would work, making the short-term impact potentially quite large.

• Overall global trade: so far the tariffs cover an extremely small fraction of global trade and GDP, so the macro impact is small, but likely centered in capex due to uncertainty about longer-term trade rules.

• International trade will only become a macro issue when interest rates rise to a level that creates macro vulnerabilities; trade frictions will not create systemic macro issues, but they will make any interest rate-driven issues worse.

• Sector-specific issues are greater and more focused on goods than services given Trump’s penchant for the old economy and his white, male working-class supporters.

• My long-term estimate of global nominal GDP growth, and hence earnings and dividend growth, have been 4-6% based on 2-3% real growth and 2-3% inflation.

• I view these trade frictions and the growing lack of global cooperation on important issues as the equivalent of throwing sand in the gears of the global economy. This slows down growth and the resulting diminished competition among nations means higher inflation.

• I still look for 4-6% nominal GDP growth but with 1½-2½% growth and 2½-3½% inflation. This mix, in my view, generates higher yields, lower P/Es, and lower inflation-adjusted equity returns over the coming decade (my operational definition of longer-term).

Thank you for reading,