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How Trumpanomics Might Keep Mortgage Rates Low

 Feb 13, 2018 8:00 AM

The winter games are here, and I’m looking forward to watching the new snowboarding event, called “Big Air”. Can you guess what is involved? It’s basically like ski jumping but way more fun because they’re doing crazy tricks.

Even a hermit living in a remote country has heard The Donald say, “Make America great again!” It has its own hashtag #MAGA.

However, have you ever heard Trump say, “Make America great again and our close friends!”? No, not only is the hashtag messed up #MAGAAOCF, but it’s a “me first” mentality that often implies it’s at the expense of others. It’s not an inclusive and cooperating mentality.

In contrast, I think you can go a little too far with inclusiveness. Consider our lovely photobombing PM, Justin Trudeau, and his invention of the word “peoplekind”. #seriously?!

Let’s look at some of the actual quotes from Donald:

I will build a great wall -- and nobody builds walls better than me, believe me --and I'll build them very inexpensively. I will build a great, great wall on our southern border, and I will make Mexico pay for that wall. Mark my words.

The trade is so easy for me. It's so obvious what's happening when our companies are flocking out. I am going to fix our trade. I am going to bring jobs back to America.

I will negotiate fair, bilateral trade deals that bring jobs and industry back onto American shores.

We have to renegotiate our trade deals, and we have to stop these countries from stealing our companies and our jobs.

I believe in free trade, but I really believe in making great deals for the United States.

Building the wall is absurd, but it demonstrates the sentiment or mentality. Me me me. It’s called protectionism, and I can understand why it resonates with the average person in America. However, when you understand that protectionism will hurt more than help, then you have to be open-minded.

In November 2016, Donald Trump announced he would leave the TPP (Trans-Pacific Partnership) deal. The rest of the world is on notice that Trumponomics is here.

What is Protectionism

In economic theory, Protectionism is any policy restraining trade between countries. They ways in which they do it can vary but include tariffs on imports, quotas on imports, subsidies to local industry, and devaluing the currency. In theory, these protectionist policies are supposed to protect the local businesses, manufacturers, and workers from foreign competitors.

Tariffs to tax imports – In January, Trump announced four years of 30% tariffs on all washing machines and solar panels made outside the U.S. The largest producer of solar panels and washing machines is China. Trump believes U.S. manufacturing can and should be competing against the factories in China. In many ways, this is like pushing rope. Furthermore, don’t expect China to take this lying down.

Subsidies from government – A subsidy can come in the form of tax breaks to local industries, or a government can subsidize exports to another country. Reducing taxes to an industry allows them to produce it cheaper and compete better.

Quotas – This is simply limiting the amount of physical goods allowed to be imported into the country. Last summer, Trump commented that the U.S. is a dumping ground for steel, and he will consider implementing a quota. "They're dumping steel and destroying our steel industry, they've been doing it for decades, and I'm stopping it. It'll stop."

Although Trump wants to protect his people, industries, jobs etc., the policy of protectionism actually has a negative effect on economic growth in the long term. Free trade, on the other hand has been shown to stimulate the economic welfare of a country. I think Trump and everyone knows this, but the key is “long-term”.

He views the US as losing a major trading war against China, who has taken away all the manufacturing jobs, but he doesn’t see that the US need not be reliant on manufacturing jobs anymore. They have evolved into other higher skill positions. Transitioning back to manufacturing sets them backwards!

Trump may only be in office for a couple more years. He loves tweeting about his latest score to boost his ego. In January, Ford Motors announced they are cancelling a $1.6 BN manufacturing plant in Mexico, as a direct result of Trump’s strong arm. Instead, Ford will bring the jobs to Michigan. Next in Trump’s sights is GM, with this tweet that doesn’t mix words, “General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!”

Trump loves to tell you he’s the hero.

Bottom Line

There is a shift towards Protectionism in the US. It won’t happen suddenly and overnight, but the lines have been drawn. Everyone is on notice that the largest economy is protecting its people – at the short-term expense of everyone else.

It’s only natural that other countries will retaliate. This will cause trade to slow and global economic growth to slow.

For Canada, our largest trading partner is the US. So, if the NAFTA agreement is cancelled, limited, skewed, whatever, it will cause friction. Trump may say he wants a fair agreement, but what he wants is a win.

It’s the long term where the impacts will be mostly felt. Industries that shouldn’t be operating in that country are still doing it. They won’t be specializing and moving on. They’ll be dragged back to manufacturing jobs they don’t actually want because the rhetoric sounds good to popular opinion. It makes a great tweet.

How does this affect mortgage rates?

Simply, as economic growth slows, the need for lower interest rates to stimulate the economy increases. As mortgage rates are based on Government of Canada bond yields, it’s not inconceivable to believe Trumponomics will cause lower rates for years to come, lowering mortgage rates.


About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

Interest Rate, Economy  



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