Trump’s Tariffs: How Will Canadian Cannabis Be Impacted?

The pressure is off for a month, but Canadian exports remain at risk of being hit with an unprecedented 25% tariff on all goods (and 10% on energy & oil). Canada has responded with targeted tariffs of their own (mostly food, equipment and apparel as of right now) as well as a host of ‘Buy Canadian” initiatives.

Here are the ramifications for the Canadian cannabis sector and consumers:

SHORT TERM (0-3 months) – TAKE A DEEP BREATH…

There will be a minimal impact on LPs and consumers

All cannabis sold here is home grown and processed. There is little reliance on US inputs, save some packaging, equipment, and fertilizer.

Higher prices on imported US inputs would constitute a small share of the COGS and could easily be switched to other suppliers and products.

MEDIUM TERM (3-12 months) – NOW WORRY...

> The Economy

A large and persistent tariff will have a significant recessionary impact on all Canadians. RBC analysis suggests that 25% tariffs could stymie Canadian growth for up to three years and lead to a GDP drop of around 4%. A Bank of Canada estimate even puts the potential GDP decline at 6%. These drops could increase unemployment and inflation by 2-3 & 3-4 percentage points respectively.

> The Consumer

While short term spending on weed could hold up like tobacco and bev alc, it probably won’t in a serious recession Canadians will have less money to spend. It is very likely we’ll see a change in spending patterns towards less premium bands and smaller package sizes.

US brands produced here could also witness sales declines from “Buy Canadian” sentiments. Canadian product substitutes will be the beneficiaries.

> Government Reform

There is no chance for any excise tax relief. The gov't won’t cut tax revenues that it will need for corporate bailouts and unemployment relief.

There will finally be a push to harmonize trade and procurement practices within Canada. If this impacts provincial wholesalers, it will be a real positive.

> Stock markets

Tariffs are not good for markets especially if they lead to unnecessary trade wars. Volatility and declines won’t help cannabis stocks or efforts to raise money.

Of course, a variety of Canadian monetary and fiscal measures could mitigate these effects, at considerable cost.

Fortunately, Trump’s tariffs have built-in political off ramps over the next 3 moths – if he takes them:

1. His own deadline of April 1 for a Commerce Dept. study on the trade relationship between the US & Canada.

2. Trump used the International Emergency Economic Powers Act to enact the tariffs. The Congress delegates this time-limited authority to the President. As such, these tariffs will have a built-in end date (unless approved for longer by an unlikely joint resolution of the Congress).

3. Through court challenges. The timing is tbd.

See you in 30 days.

#canada #risk #tariffs #trump #LPS