Economists predict that both Canada and the United States will face lower employment, declining productivity, and increasing inflation in the wake of U.S. President Donald Trump’s imposition of steep tariffs on Canada.
Beginning Tuesday, the U.S. officially imposed a 25 per cent tariff on Canadian goods with the exception of energy products, subject to a 10 per cent tariff after Trump had promised for months to impose such a tariff.
Prime Minister Justin Trudeau announced that the Canadian government would impose retaliatory tariffs of 25 per cent on $155 billion of American goods – starting with tariffs on $30 billion worth of goods immediately.
While Trump has touted tariffs as a tool that will help bring about American prosperity, Canadian lawmakers have emphasized the necessity to counter American trade hostility with countermeasures of our own.
However, economists are predicting that the tariffs will create an economic downturn in both Canada and the U.S.
In a comment to True North, financial analyst Matthew Lau said that American tariffs and Canadian counter-tariffs will result in reduced economic activity for both countries.
“Both countries will be negatively affected. In both countries, productivity, employment, and GDP will be lower, and inflation will be higher, than if there were no tariffs,” said Lau.
Lau cites a report from the Tax Foundation that estimates Trump’s tariffs on Canada and other countries will reduce after-tax incomes in the U.S. by 1.7% before accounting for the effect of retaliatory tariffs.
Lau points out that while Trump’s tariffs will have a greater negative effect on Canada than on the U.S., the response from policymakers can mitigate or exacerbate the effects of the tariffs.
“The long-term impact on the Canadian economy depends on how long the tariffs stay in place and how the federal and provincial governments in Canada react to the tariffs,” said Lau.
“Reducing regulation and internal trade barriers would mitigate the negative impact of tariffs. Increasing taxes or increasing government spending would make things worse.”
BMO Financial Group’s chief economist Douglas Porter similarly told True North that the U.S. won’t be as severely impacted by tariffs on Canadian goods, given the enormous size of the American economy to that of the Canadian economy.
“Even with retaliation from Canada, Mexico and China, the damage will be less severe than for Canada, as the US economy is nowhere nearly as dependent on trade,” said Porter.
“For example, Canadian exports to the US make up almost 20 per cent of Canada’s GDP, but US exports to Canada are little more than 1 per cent of US GDP. It’s a similar calculation between the US and Mexico.”
Porter says that in the short term, Canada’s manufacturing sector will be hit hardest, depending on how individual businesses respond to the new trade environment.
“For manufacturing workers, the impact could be felt very quickly, depending on how specific companies respond. A chill in spending could also set in fairly quickly, given the deep uncertainty of the situation, and its high-profile nature,” said Porter.
In the longer term, the tariffs will have the effect of driving down economic growth and investment with a boost in the inflation rate.
“The combination of US tariffs, the Canadian retaliation, and the financial market reaction will tend to weaken growth, undercut jobs, and push up some prices. Our view is that the dominant theme will be weaker growth, which will ultimately be more important than the moderate boost to inflation,” said Porter.
“We believe that the trade war will carve 1-2 ppts off GDP growth this year and next, while initially boosting inflation by about 1 ppt, and the unemployment rate by a bit more than that. However, by next year, we suspect that the inflation bump will have receded, while growth remains weak.”
Even if America and Canada back away from tariffs, Porter says the aftermath of the trade conflict could leave a lingering chilling effect on business investment, but also present a chance to develop alternative trade relationships and opportunities.
“However, this episode may also lead to better co-operation and trade between the provinces, and lead to more open trade relations with countries outside of North America, especially for resources.”
So far, the federal government has retaliated by imposing dollar-for-dollar counter-tariffs while many provincial governments across the country remove American-made liquor from their store shelves.