The Impact of Steel and Aluminum Tariffs: Part II


Last week the President signed new tariffs on steel and aluminum, which are set to go effective within two weeks. The President indicated that there may be exemptions out for certain allies like Canada and Mexico. Though America’s neighbors have received an exemption, it is only temporary, and a full exemption will be dependent upon renegotiating the North American Free Trade Agreement (“NAFTA”). Notably however, the European Union is displeased with the new tariffs, and they are threatening to propose reciprocal tariffs on U.S. goods such as motorcycles, alcohol, and tobacco products, if they do not attain a permanent exemption. China too has threatened retaliation against U.S. exports like coal.

As a investors attempt to understand the market implications of the new tariffs and a potential trade war, we wanted to discuss how this could impact sectors of particular interest to us, namely cryptocurrency, biotech, and cannabis.

Blockchain and Cryptocurrency – Virtual Goods, Real Computing Power

Cryptocurrency, and Blockchain may be virtual but the businesses running mining operations and developing software are very real. These companies could be impacted by an all out trade war or even a reconfigured NAFTA, because their business models are based on the free flow of high-tech goods. A profitable cryptocurrency mining operation requires lots of computing power to “mine” for currency. This computing power is provided by Graphics Processing Units (“GPU”) which run the mining computers. Currently lots of cryptocurrency mining operations are based in Canada where the weather is cool and hydroelectric power is cheap and plentiful.

Tariffs however, could end up increasing the price of GPU, which means that manufactures like NVIDIA (NVDA) could see margin compression. It also means that mining companies like Hashchain Technologies (KASH:TSXV) or HIVE (HIVE:TSXV) might find it more profitable to move their operations from Canada to places like Sweden, Iceland or Switzerland, where the climate is suitable for mining, and the impact of the U.S. tariffs could be minimized.

Cannabis – B.C. Buddies no more?

Cannabis is even more integrated across North America than crypto-mining. Cannabis is fully legalized in Canada, so U.S. distributors will often buy cannabis and cannabis-related products from growers in Canada. While the cannabis industry itself may not be particularly impacted by the new steel tariffs, a reconfiguration of NAFTA could increase the price of Canada-imported cannabis if trading with Canada is no longer “free”. Canadian players that supply the U.S. market like Aphria (APH.TO), Canopy Growth Co. (WEED.TO) could be particularly affected as their businesses are somewhat reliant on U.S. export.

Conversely, U.S. based cannabis companies that are fully integrated and able to cultivate, grow, harvest and extract their own product should be fairly well insulated from the effects of trade tariffs and a renegotiated NAFTA. In fact, U.S. cannabis companies that are truly vertically integrated could gain market share, as U.S. companies that are currently importing product from Canada will probably need to find a domestic supplier of goods.

The Biotech Brain Drain

The potential implications for small cap biotech are a little more indirect, since most of these companies are in the development stage, and aren’t manufacturing devices or medicines just yet. Nonetheless, the sector would not be wholly immune from a new NAFTA agreement.

Under NAFTA, skilled scientists and engineers can work across the borders on projects that span facilities in one or more countries with minimal or no issues around immigration or logistics. It’s unclear whether a new NAFTA agreement (or the U.S.’ new immigration policy) would impede the flow of talent to and from the U.S., but it is a possibility. Were that to happen, biotech companies that import scientists from abroad could be at a distinct disadvantage to those that source homegrown talent.

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