^InsightsTrade Wars and Tariffs: Impact on Canada

The Brewing Economic Storm

As we brace for President Trump’s tenure, the economic landscape teeters on the brink of significant uncertainty. Central to the brewing storm are Trump’s proposed tariffs—steep levies of 25% on goods from Canada and Mexico, and 10% from China. While framed as measures to bolster U.S. border security, these proposals might just be a guise to protect domestic industries, suggesting that more stringent border control could ease tensions without resorting to harsh tariffs.

The Canadian Perspective: High Stakes at the Border

The stakes are high globally, but specifically for Canada. Holding the sixth-largest trade surplus with the U.S., the repercussions of these tariffs could send shockwaves through its economy, where goods exported to the U.S. contribute about 20% to the GDP. Despite Canada’s preemptive $1.6 billion boost to border security, the uncertainty remains palpable and unsettling.

Impact on Canadian Economy: Downturn ahead?

At a recent press briefing on Canada’s interest rate directions, Bank of Canada Governor Tiff Macklem highlighted the severe economic downturn that could ensue from such tariffs. A 2019 simulation by the Bank envisioned a scenario where a 25% U.S. tariff, met with equivalent retaliatory tariffs, could diminish Canada’s GDP by an unprecedented 6%—surpassing declines observed in any prior recessions, save for the initial COVID-19 downturn.

Impact on US Economy: Stagflation and Investor Anxiety

However, the economic strain wouldn’t be one-sided. The U.S. might find itself grappling with stagflation, where slow growth meets rising inflation. The alarm bells are already ringing, evidenced by a significant uptick in long-term interest rates—10-year U.S. government bond yields have surged by 100 basis points, a marker of investor anxiety. These indicators should ideally serve as a cautionary tale for President Trump about the broad, adverse impacts his protectionist stance could have on American commerce and the wider economy.

Energy and Automotive Sectors

Given the intertwined nature of U.S. and Canadian industries, especially in energy and automotive sectors, it’s doubtful that such extensive tariffs will be executed. These industries underscore a mutual dependency that is too critical to disregard. The energy sector alone, with the U.S. relying on Canada for 60% of its oil and all its natural gas imports, illustrates an inextricable bond that tariffs would only jeopardize.

The Role of Diplomacy

Yet, as diplomatic efforts are essential to maintain these robust economic ties, one can’t help but question, with Trump’s unpredictable approach, whether true diplomacy can prevail.

Sources:

• NBF Economics
• Scotiabank Economics