Impending Tariffs and Trade War Clouds Looming Between the United States and Canada

Impending Tariffs and Trade War Clouds Looming Between the United States and Canada by Maj (ret'd) CORNELIU. CHISU, CD, PMSC, FEC, CET, P. Eng. Former Member of Parliament Pickering-Scarborough East U.S. President Donald Trump seemed to have made good on his threats to impose tariffs on last Saturday, when he signed an executive order that would impose levies of 25 percent on all imports from Canada and Mexico, except for Canadian energy, which would face a tariff of 10 percent. The order included a provision to trigger even higher tariffs if the targets of the order respond with tariffs of their own. Prime Minister Justin Trudeau quickly responded by announcing a package of retaliatory tariffs. Mexican President Claudia Sheinbaum also vowed to retaliate. Following last-minute negotiations, however, both Canada and Mexico were able to secure a 30-day delay on the imposition of the American tariffs. Clearly, the situation is fluid. While a temporary pause is better than nothing, the threat remains. If the full extent of Trump’s tariffs are eventually implemented, there is a real risk that these actions could spark a trade war the likes of which have not been seen since the Great Depression. Consider the facts for Canada: 77% of our exports are to the United States, and only 17% of the United States’ exports are to Canada. Is that a position of equal strength? Aside from the massive difference in economic strength, at this crucial moment Canada is in a very weak position politically. Coping with the stress of these tariffs with a prorogued parliament, a Prime Minister who has resigned, and a Liberal leadership contest in place to replace him by March 9 all attest to a lack of the strong leadership that is now needed. To add to the political instability, the biggest Province, Ontario, is involved in an early election process. An election called by Premier Doug Ford who was looking to hang onto power for four more years. This election is not about the interest of Ontarians and Canadians, but an entirely self-interested move. It is sad to see all of Canada’s political leaders running in circles, unprepared for the dark future ahead, uttering empty threats, totally oblivious to the grave consequences Canada is about to face due to their childish posturing and total lack of leadership. For Canada, the impact will be severe: a 25 percent tariff on all goods and a 10 percent tariff on energy. Together, these cover roughly 80 percent of the $600 billion in exports we send to the U.S. each year. While these tariffs are not a direct tax on Canadians, the effects will be felt through reduced demand for our goods. Although we will get a clearer picture in the coming days, some quick calculations outlined by knowledgeable experts reveal just how significant the economic hit could be. If U.S. demand drops in proportion to the tariff it will translate to a $160 billion blow to Canada’s economy—$100 billion in direct losses and another $60 billion in upstream effects. The pain varies a lot across sectors. Vehicle manufacturing, mostly in Ontario, could see demand fall by more than 15 percent, with some subsectors approaching a staggering 25 percent decline. These estimates likely underestimate significantly, the broader disruption to supply chains that crisscross the border. Nevertheless, Ford is campaigning on an attitude of reckless retaliation, threatening to withdraw US liquor from the LCBO government owned stores and tearing up a contract worth 100 million dollars with Elon Musk’s company, Starlink. He is clearly not thinking either of the broader consequences, or the cost that has already been incurred. (Liquor we have already bought, the cost of breaking a contract….) Obviously, the taxpayers will be stuck with the tab. So, Ford is fiddling while Ontario burns, eh? Other manufacturing industries, mostly in Quebec, would face an average demand drop of about 10 percent, while the resource and agriculture sectors would see declines of around 8 percent. Even industries not directly targeted by tariffs, like services, would take a hit. While the impact on services may seem modest, this sector makes up the bulk of Canada’s economy, a unique position to be in among G7 countries. If these output losses translate proportionally to employment, Canada could see roughly 600,000 fewer jobs, potentially pushing the unemployment rate up to nearly 10 percent. However, this is a rough estimate and losses would take some time to materialize. In response to US tariffs, Canada is threatening to hit back with its own tariffs starting at 25 percent on $30 billion in U.S. goods and expanding to $155 billion in just three weeks. That covers about one-third of what we import from the U.S. While some specifics are still unclear, this appears to be the most extensive retaliation the government could impose without targeting imports essential to our own industries. The former account for about one-third of total Canadian imports from the U.S. Unfortunately, retaliation will only hurt the U.S. slightly, while it will hurt the Canadian economy substantially. Moreover, the pain for Canada will come more quickly than if there is no retaliation, as the initial drop in our GDP will be more than twice as large. Unlike Trump’s tariffs, which will hit all Canadian products, Canada’s planned retaliation will hit consumer goods, but not the intermediate inputs imported by Canadian producers. Make no mistake. This is still a tax increase on Canadians, one that will further slow our economy. By stopping of a strict dollar-for-dollar escalation for the moment short, policymakers have at least avoided inflicting even greater damage on Canadian businesses and consumers. Let’s now hope that economic pain on both sides of the border forces a rethink by the U.S. administration before the damage becomes permanent. As we are at the early stages of this crisis, some interesting developments are likely to follow in the near future. The question is, how can win-win solutions be achieved to the problems Canada faces at present? Saddled at the helm with a thoughtless, mindless, desperately weak political class composed primarily of elected former political staffers with no business experience, dare we hope for a strong, astute, economically knowledgeable outsider to emerge as leader? For now, we have 30 days to act.