After last night's announcement of ~20% tariffs on softwood lumber imported from Canada, Prime Minister Justin Trudeau lashed out at the Trump administration saying the U.S. could suffer from a "thickening" border as trade tensions between the two countries escalated, sending the Canadian currency to a 14 month low.

As a reminder, the United States announced it would impose preliminary anti-subsidy duties averaging 20 percent on imports of Canadian softwood lumber, Commerce Secretary Wilbur Ross said on Monday, escalating a long-running trade dispute between the two neighbors. The move, which affects some $5.66 billion worth of imports of the construction material, sets a tense tone as the two countries and Mexico prepare to renegotiate the 23-year-old North American Free Trade Agreement.

Speaking to a technology company in Ontario, Trudeau said he would defend the national interest: "standing up for Canada's interests is what my job is, whether it's softwood or software," Trudeau said, prompting applause and cheers.

"You cannot thicken this border without hurting people on both sides of it. Any two countries are going to have issues that will be irritants to the relationship and, quite frankly, having a good constructive working relationship allows us to work through those irritants."

Elsewhere, Canada's Natural Resources Minister Jim Carr said the U.S. move to set tariffs on softwood lumber shipments are an “unfair and unwarranted trade action.” Speaking to reproters in Ottawa, Carr said that Canada is looking at an aid package for lumber industry and workers which could up to $300 million, and added that a court challenge of duties is possible, and that Canada has won all of those cases in the past.

Carr also said free trade is in the best interest of both nations: "There are irritants in the trading relationship, they aren’t new."

Canada's Liberal Party leader says the two countries are economically interconnected, but it's not a one-way relationship. He said that millions of U.S. jobs depend on smooth flow of goods, services and people back and forth across the border. The Prime Minister also vowed to stand up for Canadian interests after Trump's decision sent the Canadian dollar to a 14-month low.

Yet while the currency fell, shares in Canadian lumber companies rose as the level of the new tariffs came in at the low end of what investors were expecting. Shares in West Fraser Timber, which would pay the highest duty rate of the affected companies, rose 5.6 percent to C$59.50 and the Canfor stock gained 3.5 percent to C$18.82. The average 20 percent anti-subsidy duties announced late on Monday compared to a 20-30 percent range expected by RBC equity analysts.

As Reuters adds, softwood lumber joins dairy as a key target for U.S. President Donald Trump, who tweeted a new attack on Canada's supply management system for dairy on Tuesday. Last week the president called Canada's dairy protections "unfair." "Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!" Trump tweeted Tuesday morning.

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So what does Trump's announcement mean for the Canadian economy? Here is a summary of the key takeaways from a BofA note on the escalating trade war between the US and Canada.

Trade uncertainty back to the forefront after US announced preliminary duties on Canadian softwood lumber exports.

The announcement on tariffs was accompanied by negative comments regarding NAFTA, which may herald NAFTA renegotiation.

Downside risks to growth intensify as higher tariffs lower exports and higher uncertainty delays investment.

And the details:

Trade uncertainty back to the forefront



US wants to renegotiate NAFTA

The US is likely to open the North America Free Trade Agreement (NAFTA) for renegotiation and is willing to use tariffs to contest what it considers unfair trade. This has been our long standing view, but we got clear evidence that the US will be very active on the trade front after Wilbur Ross, US commerce secretary, announced on April 24th the imposition of preliminary duties of almost 20% against Canadian softwood lumber exports. Ross said that the US is using countervailing duties after it was “not able to achieve a fair result” through negotiation with Canada. He said that Canada benefits from a provision in NAFTA that allows Canada to supersede US sovereignty.

Downside risks to Canadian growth

The imposition of countervailing tariffs along with the comments on NAFTA increases uncertainty regarding trade policies for the North America region, which will likely delay investment. Although we believe that Canada is not the main target of US anti-trade policies, it is certainly very exposed to US trade. Higher tariffs will have a negative impact on production in the Canadian lumber industry (Lumber exports are almost 1% of Canadian GDP). Growth in Canada has been surprising to the upside, in line with our more constructive view of the economy. But the likely renegotiation of NAFTA and an active US trade policy put downside risks on our 2.3% GDP growth expectation for 2017.

Renegotiation of NAFTA is positive, but…

We expect the US to send a notification to open NAFTA for renegotiation soon. That will open a 90 day window for countries to prepare. Any renegotiation is likely to be lengthy, going well into 2018. And an institutional renegotiation of NAFTA has a good chance of ending with an updated agreement that benefits the region by incorporating new sectors into the treaty (e.g., energy, ecommerce). Consider the TPP blueprint that the staffs of the three countries involved had already agreed on as a starting point. But in the meantime uncertainty will likely be high as countries take different postures or even actions such as the impositions of tariffs to improve their leverage. The risk is that it all ends in a trade war, although the strength of the value chains in North America makes the latter an unlikely scenario, in our view.

Back to dovish BoC

The increase on trade uncertainty will be highlighted by the BoC, which will support our strategists’ view of a weaker CAD, in our view.