Europe Learns To Love Tariffs, Canada Learns What Happens When You Don’t

By Benjamin Picton, senior market strategist at Rabobank

US and European equity indices were firmly in the black on Friday as the recent run up in bond yields took a breather. The S&P500 closed 46 points higher at 7811 with strong gains across the real estate, consumer discretionary, healthcare and financial sectors. US 10-year yields were just over 1bp higher on the day, but down by almost 7bps over the course of the week with most of the decline in yields arriving on Thursday.

The yield on French 10-year bonds fell by 4.2bps to close the week slightly lower. That helped to propel the CAC40 to a 0.95% gain on Friday, with Arcelor Mittal, Capgemini, L’Oreal, Hermes, and Renault among the most prolific gainers. Renault shares got a boost from news that the European Union will enact a 350,000 quota against imports of Chinese hybrid and plug-in hybrid vehicles, above which much steeper tariffs will kick in.

For context, Chinese exports of hybrid cars into the European market have risen from approximately 300,000 in 2025 to an estimated 800,000 in 2026 according to the Financial Times. EU Trade Commissioner Maros Sefcovic expects the new safeguard measure to reduce Chinese imports by more than 50%. Importantly, the measures were agreed bilaterally with Beijing (thereby minimizing risk of retaliation) and do not require any evidence of market abuse to be enacted.

Politico reported over the weekend that Germany would like Britain to raise tariffs on Chinese electric vehicles in exchange for preferential access to the European market amid a lingering sense on the continent that Britain should not be allowed to cherry-pick the benefits of EU membership. A desire to make Britons feel the consequences of emphasizing their own sovereignty above economic access in 2016 is particularly acute in France, where temptations toward nationalistic chest-thumping are perhaps encouraged by centuries of rivalry with Britain and the context of an impending Presidential election where populist candidates are expected to do well.

The German quid-pro-quo for Britain sounds eerily reminiscent of the deal offered to Canada by the United States, whereby a common external tariff vis-à-vis China seems to have been the price of admission for Canada to secure the most favorable terms of access to the US market of any country. There was plenty of nationalistic chest-thumping (or raising of elbows) in that case, too, but the Trump administration saw that arrangement as necessary to prevent China from back-dooring goods into the American market via Canadian ports. In Britain’s case, the move seems to be more about signalling solidarity since the fact that the steering wheel is on the wrong side of the car already acts as a trade barrier of sorts preventing Chinese hybrids from flowing through the UK into Europe in large numbers.

Canada famously spurned the United States’ offer so it could maintain full sovereignty over trade decisions, but this has come at a cost for Canadian exporters who had typically sent approximately two thirds of their products into the US market. Employment figures released by Statistics Canada last week confirmed that the Canadian economy shed 68,300 jobs in September, following on from a 41,700 decline in employment in August. The unemployment rate rose from 6.4% to 6.5% despite a decline in workforce participation. The Canadian economy likely would have been in even worse shape had the wars in the Middle East and Eastern Europe not boosted demand for Canadian potash and energy products.

While the EU’s new protectionist measures vis-à-vis Chinese hybrid electric vehicles hold sectoral significance, they miss the structural problem of large and growing imbalances driven in large part by Chinese overproduction amid weak domestic demand. Unsurprisingly, captains of European industry from other sectors (notably, chemicals) are already agitating for similarly robust protectionist measures to be enacted against Chinese imports that compete with their own products. Eventually the European Commission may run out of sectoral policy fingers to plug the holes in the dike and simply opt for blanket protection – tariffs – in the way that the US has already done.

The problem is unlikely to be solved on the Chinese end. Despite frequent nods towards domestic rebalancing in favor of greater consumption, policy continues to prioritise investment and production, especially in areas of high tech. Any large policy tilt towards consumerism faces ideological opposition as well as – arguably – financial constraints, given China’s rapid public debt accumulation and already-stretched fiscal balance. Raising taxes to address fiscal issues might be self-defeating if the intention is to boost consumption through more generous social programs, but China is raising taxes on wealthy Chinese who shelter assets offshore.

Beijing’s trade template: China overtook Germany in exports of industrial machinery and equipment, in exports of specialized industrial machinery and will any minute overtake it in share of road vehicle exports. Coming to a Data Center near you next. https://t.co/eoHrZ2i6iV

— zerohedge (@zerohedge) October 12, 2026

The huge US investments in AI and other high-tech applications (mostly financed by private capital) have pushed China into an investment arms race of sorts that could leave limited fiscal room for social programs. This bears some similarities to the military arms race that Reagan enacted against the Soviet Union in the 1980s, but does the United States still hold the financial superiority that is required to win such a race?

Not to be overlooked, geopolitical events over the weekend are again shaping up to be major drivers for energy markets. In a positive sign, Donald Trump announced that Russia and Ukraine had agreed to an “energy ceasefire”, but the ceasefire was promptly broken by Russian strikes on power plants in Kharkiv and Kiev. Trump had earlier indicated that it might be time for Zelenskyy to step down as Ukraine’s President after repeated requests from the United States to cease attacks on Russian oil refineries went unheeded. According to reports of statements made by anonymous Ukrainian officials, the energy ceasefire came about after US negotiators indicated that the US could withdraw intelligence sharing if those requests continued to be ignored.

Another factor may have been a deal announced by Donald Trump between Russia and the USA that would see 1.8m tons of Russian diesel granted sanctions relief to be exported into the US market in coming months. President Zelenskyy described the deal as a “gift to Russia” and the deal faces resistance from lawmakers in Congress, but the White House may view the deal as killing two birds with one stone as it seeks to lower fuel costs for American consumers and pressure Ukraine not to engage in tactics perceived to run counter to US interests.

The Middle East, too, continued to produce headlines that will influence energy markets. Yemen’s Houthis launched strikes on Saudi Arabia’s King Khalid international airport in Riyadh, killing at least twelve people and reportedly injuring hundreds more. The strikes follow a renewed offensive last week by Saudi Arabia and Yemeni government forces along the Red Sea coast to reclaim territory lost to the Houthis. The strikes coincide with Energy Week in Riyadh and have seen several oil and gas executives reconsider plans to attend conferences in the Saudi capital.

DISTURBING CONTENT: Passengers are seen lining up at security and sitting in a waiting area at Saudi Arabia’s Riyadh airport just moments before a deadly attack sends people scrambling for cover. The newly released surveillance footage captures the terrifying moments surrounding Saturday’s strike, which killed 13 people and wounded more than 300. Yemen’s Iran-backed Houthi rebels have claimed responsibility for the attack, which has forced the international airport to suspend operations.

— Fox News (@FoxNews) October 12, 2026

There was also further news of strikes on shipping in the Strait of Hormuz over the weekend. The IRGC claimed that a ship attempting to navigate a route not approved by Iran struck a marine mine, while the UK’s Maritime Trade Office reported that two ships had been struck by projectiles off the coast of the UAE and in the Gulf of Oman.

The IRGC-Navy says a supertanker involved in illegal activity, carrying crude oil and attempting to exit the Strait of Hormoz through unauthorized route, got struck with a massive blast after colliding with a naval mine in a designated high-risk area. This supertanker, which had turned off AIS, is currently engulfed in a massive fire.

— Arya Yadegaar (@AryJeayBackup) October 10, 2026

US CENTCOM also confirmed that it had immobilized a Panama-flagged vessel attempting to run the American blockade of Iranian ports. Nevertheless, Brent crude is trading lower this morning at $106/bbl at time of writing.