How the Trump trade is running out of juice

The TSX experienced a 100-point surge after Trump announced his support for the Keystone XL pipeline, despite the fact that the announcement was expected and should have already been priced in.

Read: Trump signs orders advancing Keystone, Dakota pipelines

As Trump proceeds with other “easy” executive orders — on infrastructure, tax cuts and cash repatriation, for example — stocks might become even more fully priced, Benjamin Tal, deputy chief economist at CIBC World Markets, says in a note. But that’s only in the near term.

Longer term, Trump is sure to experience pushback on his expansionary policies and protectionism as their effectiveness is called into question.

Policy pipe dreams

His infrastructure spend is expected to create about 50,000 new jobs a year, but that’s “nothing more than a rounding error,” says Tal.

“Stocks in the engineering and construction space will likely have to wait for a bigger catalyst,” Nick Exarhos, director at CIBC World Markets, says in the report. “Especially with the Canadian infrastructure plan only likely to take full effect in ’18.”

Read: Overvalued assets to avoid

Trump’s potential cuts to personal taxes equally underwhelm. “No less than 80% of that cut will go to the top 10% with very low propensities to consume,” says Tal.

The effect of corporate tax cuts will also be modest. “Corporate tax cuts will help,” says Tal, “but given that the effective tax rate is notably lower than the headline 35% rate […] the macro economic implications will be more modest than advertised.”

Further, cash repatriation will go mostly to stock buyback, not capital expenditure and jobs.

As the U.S. economy fails to achieve the required performance needed to prevent a rise in the debt-to-GDP ratio, “Congress will wake up,” says Tal, and Trump’s days of easy executive orders will be over.

Trump’s trade troubles

An uproar by Congress makes a Trump-led withdrawal from NAFTA unlikely, National Bank economists say in a report. While the president can withdraw unilaterally from trade agreements with only six months’ notice, the fallout to businesses and potential lawsuits make that a long shot.

More likely is the introduction of tariffs on business sectors that outsource operations, which Trump has the legal authority to do without the approval of Congress. It’s not clear, however, whether Trump can target specific companies for sending jobs abroad. Trade experts say that that could contravene constitutional guarantees of equal protection, National Bank says.

For consumers, import tariffs would feel like a tax for the lowest-earning 20% of U.S. workers, who would hardly benefit from the president’s proposed personal tax cuts, says Tal. That’s as economic data disappoints. Numbers released last week showed the U.S. economy grew by 1.6% over 2016, the slowest annual growth in five years.

Read: Economic impact of Trump’s Mexican tariff proposal

Potentially, the most important impact of protectionism would be U.S. exporters’ reduced access to high-end, emerging market consumers.

“That’s the fastest growing consumer market globally,” says Tal. Young and sophisticated, these consumers spend more than American teens and want high-quality, brand-name products.

Trump’s tariff policy “will end up being as ambiguous as the plan to make Mexico pay for the wall.”

Trouble for Canada?

Ultimately, Canada won’t be the primary target of U.S. protectionism, says National Bank, because there’s no large trade deficit between the countries.

In 2015, the U.S. trade deficit with Canada “amounted to only $15 billion, compared with $58 billion with Mexico and a whopping $366 billion with China,” reports the bank.

That doesn’t mean there won’t be trade renegotiations. Canada could be pressured to renegotiate several NAFTA details in side agreements, including changes to Canadian tariffs on dairy imports, quotas on Canadian timber exports and reduced access to U.S. government procurement contracts for Canadian businesses.

For investors, this new environment means a new approach is needed when assessing a company’s prospects.

“Focus on the country that the company considers its home base,” says National Bank, “and determine if that country’s relations with its main trading partners are strained in a way that might impact its bottom line.”

Also read: The link between GM’s recent layoffs and NAFTA