UPDATE
Since our prior analysis, President Trump has continued to pursue tariffs against U.S. trading partners. In March, President Trump began and then partially paused 25% tariffs on all Canadian and Mexican goods. Goods that do not satisfy CUSMA rules of origin remain subject to a 25% tariff; non-compliant CUSMA energy and potash face a 10% tariff. On April 2nd, the U.S. announced it would impose 10 percent tariffs on the vast majority of its trading partners, with higher tariffs on select countries (see Figure 1). Automobiles will also face a 25% tariff beginning April 3rd.
Figure 1. Tariff Levels for U.S. Trading Partners
Source: USA Today
However, Canada is noticeably missing from President Trump’s chart (see Figure 2), and multiple reports have suggested Canada is exempt from the baseline tariff. Further, broad-based global tariffs can only mitigate the impact to Canada’s specific economy, as Canadian-made goods will not be held at a competitive disadvantage to other foreign imports into the U.S. We do not expect the U.S. to increase domestic manufacturing capacity quickly enough to completely meet the gap in demand for goods produced internationally and will still need to import from somewhere.
Figure 2. U.S. Import Tariff by Country/Region
Source: U.S. Census Bureau, RBC
The highest tariffs impacting Asia will further underscore Gentai’s investment theme of West Coast over East Coast, as it gives Canada an opportunity to fill in export gaps to Asia should the U.S. face reciprocal tariffs. The West Coast is also better situated to take advantage of tariff arbitrage opportunities for Canadian businesses bridge trade gaps between Asia and the U.S. In addition, we have less exposure to Ontario and no loans with direct exposure to auto tariffs.
Tariffs against Canada are also widely unpopular in the U.S., which could ultimately lead to less-punitive tariffs or an eventual removal. A resolution from Democratic Sen. Tim Kaine of Virginia rejecting the tariffs just passed in the Senate. While this resolution has no teeth and will not be voted on in the House of Representatives, it is a strong political statement and may colour tariff-related discussions in the future.
Overall, we believe the situation has improved since our initial article. Your portfolio with Gentai remains well-protected as a result of our careful diligence and active portfolio monitoring practices. As this remains a developing story, we plan to provide period updates as needed.
For more information on Gentai’s products, please contact [email protected].
Original Gentai Article – February 20, 2025
Potential Impacts of the Trump Tariffs on the Canadian Economy and Gentai’s Business
The United States of America, with President Donald Trump leading the helm, has again decided to alter its international policy further in favour of protectionism and deglobalization. This policy change is expected to have detrimental impacts to the U.S. and each of its trade partners, including Canada. The scale and direction of impact for each country and each underlying product sector will heavily depend on the whims of President Trump’s tariff threats, whether he enacts them and to what degree. Gentai Capital Corporation (Gentai) is a proud Canadian company and has taken steps to protect our portfolio and your investment should tariffs ultimately stick.
Gentai is a leading Canadian alternative investment manager, offering value-added real estate financing solutions coast to coast. Since its inception, Gentai has completed over $1 billion in commercial and residential real estate loans across our three funds. To date, each of our funds have achieved or surpassed their target returns of 7% to 10% without any missed distribution payments. Having successfully navigated multiple market cycles and a variety of economic conditions, Gentai remains a trusted choice for investors and borrowers alike.
-History of Globalization Trends-
Previously, the U.S. and its trading partners had enjoyed increased productivity and rapid advances in technology stemming from what the World Economic Forum calls the fourth era of globalization, which began in 2008.
The first era (1800s-1914) is associated with the dominance of the British Pound (which was on the gold standard) and lowered transport costs due to the development of railways and refrigerated cargo ships, leading to lower food prices and thus higher real wages.
The second globalization (1945-1989) saw renewed economic cooperation after World War II, with the ‘Bretton Woods’ system establishing the U.S. Dollar as the world’s dominant reserve currency. Planes, container ships, and communications satellites brought the world closer than ever before.
The fall of the Berlin Wall in 1989, along with the opening of trade in China and India, the establishment of the European Union, and increasing adoption of the Just in Time manufacturing process, contributed to the third globalization wave (1989-2008), which brought exports as a percentage of world GDP back to 1914 levels (~15%).
Today, increasing globalization comes from the growth of e-commerce, digital services, and artificial intelligence. International trade now accounts for more than 50% of the world’s economy and about a third of the United States’, benefitting from historical lows in tariffs between major economies (see Fig. 1).
Figure 1. Tariff Levels for Major Economies
Source: World Economic Forum, World Bank DataBank
-Canada-US Trade Relations-
Canada-U.S. trade has historically benefitted from the two countries’ unique relationship in one of the world’s largest free trade zones through the Canada-United States-Mexico Agreement (CUSMA), which updated the 1994 North American Free Trade Agreement (NAFTA) to better capture intellectual property and digital trade. Under CUSMA, which was negotiated by President Trump, Prime Minister Justin Trudeau and Mexican President Enrique Peña Nieto in 2020, cross-border business was encouraged, with companies no longer requiring localized data and physical headquarters. De minimis exemptions thresholds, or the personal duty-free shipment limit, were also raised by Canada and Mexico. The agreement can next be renewed in 2026 for 16 years, but tariffs would threaten the agreement’s extension.
Today, Canada and the U.S. are heavily integrated trade partners, with nearly CAD$3.6 billion worth of goods and services crossing the border each day in 2023 (see Figures 2 and 3), as well as the greatest single investor in each other’s country. Canada is also the single largest foreign supplier of energy to the U.S.
Figure 2. U.S. Imports by Country (USD$ in billions)
Figure 3. U.S. Exports by Country (USD$ in billions)
Source: United States International Trade Commission
-Tariffs Announced on Canadian Goods-
President Trump’s tariffs against Canada began with a general tariff of 25% for all goods except oil (10% tariff), announced on January 20, 2025, to go into effect on February 1st. The general tariff was postponed after Prime Minister Trudeau and President Trump agreed to a $1.3 billion border security plan and the announcement of a Canadian border czar and is currently scheduled to go into effect March 1st. President Trump then signed executive orders on February 10th for a 25% tariff on all steel and aluminum imports into the U.S., which echoes the 25% tariff on steel and 10% tariff on aluminum he levied in his first term in 2018. Canada responded with retaliatory tariffs in 2018 targeting products with large manufacturing bases in states of key Republicans. While the tariffs may have been just a negotiating tactic, it took almost a year for the two nations to lift their tariffs and had material impacts to both economies.
Notably, the historical and proposed tariffs would be damaging to the American economy. The Tax Foundation estimates that 2018 tariffs on steel and aluminum had a negative impact on the U.S. economy, costing roughly 75,000 job losses. Today, the U.S. manufacturing center has already been underperforming. Industrial production is little changed from a year ago and the sector has on aggregate shrunk since 2017. We believe the tariffs are likely to hurt U.S. manufacturing competitiveness further and will not lead to significant re-shoring of manufacturing capacity. Further, retaliatory tariffs from Canada could be especially damaging for the U.S. economy because Canada is its largest export economy. During the prior round of tariffs, Canada’s import of U.S. steel products fell with a 30.5% lower monthly average value compared to 2017.
Assuming a trade war occurs between the U.S. and Canada, we also expect the broader Canadian economy to be negatively impacted as a result. The Canadian Dollar has already weakened relative to the U.S. Dollar, hitting a 20-year low of below 0.68 CAD/USD upon the initial signing of tariffs by President Trump. The U.S. is now pursuing broader tariffs against other trade partners, which could more-heavily weaken the U.S. economy and devalue its currency. However, given the reliance on U.S. trade (17.8% of Canadian GDP and 2.4 million jobs in 2022), it is likely the loonie will continue to weaken relative to the U.S. Dollar. Any additional weakness in the Canadian Dollar will buffer the price shock for Americans and reduce the expected drop in demand for Canadian tariffed goods. If there are retaliatory tariffs on the U.S., Canadian inflation will likely rise, but the severity depends on the speed at which cost increases can be pushed to the consumer.
Overall, Canadian bond yields are likely to stay suppressed or continue falling if the economy remains weak and unemployment increases. Notably, the real estate market should benefit from lower yields. Should bond yields continue dropping due to market uncertainty, this would help stabilize real estate valuations. However, a meaningful increase in inflation may mean that the decrease in central bank interest rates happens slower than projected.
The impacts of tariffs will also not be uniform across Canada’s provinces. Certain provinces more dependent on material exports to the U.S. will be particularly affected, including Alberta’s oil sands (see Figure 4). Oil and gas rely on exports to the U.S. for 74% and 54% of their output. Automotive and parts manufacturing impacts would be felt most in Ontario, while Quebec would be impacted by its natural resource exports. The Saguenay-Lac-Saint-Jean region in Quebec, for example, is responsible for roughly one-third of Canada’s aluminum production and 85% is currently exported to the United States. Provinces such as British Columbia (Gentai’s largest portfolio exposure), however, may actually stand to benefit due to increased foreign tourism with the weak loonie.
Figure 4. Canadian Areas Most Vulnerable to Tariffs
Source: Canadian Chamber of Commerce
-Canadian Real Estate Impact-
The Canadian real estate impact will likely be dependent on region, but we also expect different results based on residential or commercial mortgages.
On the residential side, we expect construction and renovation to become more expensive if tariffs are reciprocated. This should prop up existing real estate values, especially for more updated homes. For example, Canada currently imports roughly $3.5 billion of glass, $3 billion of appliances, $2 billion of hardware, $14 billion of metals (largely finished) from the U.S. Sourcing these materials elsewhere or creating local manufacturing capability will be more expensive. On the other hand, our current softwood and raw metal exports to the U.S. could result in lower costs for these materials domestically.
Investment in Canadian real estate by residents with access to foreign assets will benefit because of the changing currency exchange rates. While this may not be a large portion of the population, and foreign investment in general is limited by the Foreign Buyer Ban, it will prop up the value of certain types and locations of residential property.
We expect commercial real estate impacts to differ by end market as well. For example, higher costs for finished construction materials will also increase development costs for multi-family housing, resulting in fewer new starts. Less supply coming into the market will exacerbate an already existing shortage of housing in Canada’s metropolitan centres, driving up the value of existing buildings and rent.
An overall weaker economy will be detrimental to office space, which already has weathered demand declines post-pandemic, and to certain retail and industrial spaces specifically affected by the tariffs. Construction will also be meaningfully negatively impacted by the tariffs. Hotels and certain retail locations will benefit from increases in foreign travel because of a cheaper currency, at the expense of lower domestic demand. Certain industrial properties may also benefit from increased needs to produce materials domestically.
-Gentai’s Portfolio and Outlook-
Here at Gentai Capital, we have already been tracking the trend of deglobalization since well before the current proposed tariffs and had set up our portfolio to be resistant to such a shock. Although tariffs are an uncertainty, we take comfort in a variety of mitigating factors in our portfolio and believe the aggregate impact will be neutral to our portfolio.
In general, we take a very conservative approach to underwriting that focuses on borrower profiles, collateral quality, and attractiveness and likelihood of exit path. This is a key step that ensures we are lending to strong borrowers with assets and liquidity to support our obligations. Post-investment, our seasoned operations team works closely with our borrowers and has the experience to management projects and/or properties through a turbulent economic backdrop. Our efforts have resulted in a minuscule loss rate across our three funds to date and reduced exposure to sub-markets more heavily impacted by tariffs.
As mentioned earlier, the majority of our portfolio (52% across all three funds) is invested in British Columbia, where tariff impacts are more muted. The expected completion on a $18 billion liquid natural gas facility in Kitimat, British Columbia, will also diversify energy exports into Asian markets, benefiting the province. Our exposure to Alberta is primarily based on affordability, rather than exposure to oil and gas. However, we do recognize potential benefits should the five of Canada’s six largest banks that withdrew from the Net-Zero Banking Alliance in January decide to re-enter energy markets and reduce the oil and gas industry’s cost of capital. In Ontario, we are hyper-focused on desirable areas where the demographics support home values regardless of market conditions. We do not have meaningful exposure to condos in Ontario. Overall, we have generally avoided industry-heavy geographies, which we view as more exposed to economic volatility.
Our commercial portfolio is already positioned well within multifamily housing, where we believe tariff impacts will be most muted. At December 31, 2024, 81% of Gentai Commercial Mortgage Fund was in such multifamily properties.
Our investment philosophy revolves around short-term bridge loans spanning 1-2 years. As a result, our current loan book also has an overall average term-to-maturity of just five months. This ability to turn over loans quickly gives us additional flexibility to tweak our underwriting based on actual current events.
Going forward, we do plan to target investments with lower risk in the near term to compensate for market uncertainty. However, we do not view tariffs as a particularly large threat to our investment process, nor do we believe it will impact our returns going forward based on our unique investment strategy. As usual, we expect to deliver the same, consistent and attractive distributions to our investors regardless of market conditions.
For more information on Gentai’s products, please contact [email protected].
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