U.S. President Donald Trump greets Prime Minister Justin Trudeau upon his arrival at the White House, on June 20, 2019, in Washington.Alex Brandon/The Associated Press
John Turley-Ewart is a regulatory compliance consultant and Canadian banking historian.
Canada went on the offensive after Nov. 25 when president-elect Donald Trump used his social-media platform, Truth Social, to propose a 25-per-cent tariff on Canadian goods shipped to the United States.
This startling declaration prompted a first ministers’ meeting, an impromptu visit by Prime Minister Justin Trudeau to Mr. Trump’s Florida residence, Ontario Premier Doug Ford launching an Ontario-U.S. free-trade marketing campaign and Canadian promises of enhanced border security to appease the incoming president.
According to the Associated Press, Canadian officials also “started thinking about what [U.S.] items to target with tariffs in retaliation.” Retaliatory tariffs would be a costly misstep Canadians cannot afford.
How Canada should play economic defence in the coming months is now an urgent discussion policy makers must have with Canadians. The stakes are high.
Andreas Schotter, a professor of international business at Western University’s Ivey Business School, estimates that 1.5 million Canadians would lose their jobs under a 25-per-cent U.S. tariff wall. If the tariff was just 10 per cent, Prof. Schotter’s analysis suggests, at least 500,000 Canadians would be out of work. Add those numbers to the roughly 1.5 million Canadians already looking for work, and Canada will face unemployment of two million to three million in 2025.
Such an outcome would cause an economic crisis and spark understandable anger at the U.S. However, neither are reasons to use retaliatory tariffs that would amplify the crisis. The economic blowback on Canada would be too costly.
Scotiabank’s chief economist, Jean-François Perrault, has published estimates of just how costly it would be. Mr. Perrault’s work suggests retaliatory tariffs will further increase unemployment, inflation and the Bank of Canada’s policy rate (which affects interest rates paid by consumers and businesses), while decreasing GDP even more and further lowering the value of the Canadian dollar versus the U.S. dollar.
Of particular interest to policy makers and Canadians – especially those with the million-plus mortgages set to renew in 2025 – is the impact U.S. tariffs and Canadian retaliatory tariffs are likely to have on inflation and, by extension, the Bank of Canada’s interest-rate policy.
Mr. Perrault’s analysis suggests that Canada matching the U.S. 25-per-cent tariff wall on U.S. goods would add momentum to inflationary pressures, forcing the Bank of Canada to increase interest rates by as much as 2.8 percentage points by the summer of 2025. Under such a scenario Canada’s gross domestic product, used as an indicator measuring the size and health of a country’s economy, would decline by 5.6 per cent by the start of 2027.
Under a scenario where the president-elect’s new administration imposed a 10-per-cent tariff on Canadian imports and Canada responded in kind, the result would still see inflation increase and the Bank of Canada raising interest rates by about one percentage point in late 2025. GDP would fall by almost 2 per cent in such circumstances.
If Canada takes no retaliatory trade action, the outcome for Canadians is not as bad. In this situation, Mr. Perrault says, “the impact on Canada is simply a deflationary demand shock.”
With Canadian households, as the Business Council of Alberta points out, “easily the most indebted in the G7 and among the most in the entire OECD,” any response in kind to U.S. tariffs that puts upward pressure on inflation and interest rates threatens an even wider economic crisis at a time when U.S. tariffs will cause unemployment to rise and disposable income to fall. The result? More business bankruptcies and families losing their homes.
This cannot be an option.
Like a hockey team, Canada needs an effective offence and defence. It’s the offence’s job to score points for Canada in Washington to avoid U.S. tariffs. At home, we need to play economic defence. That must include pushing back against any pressure for retaliatory tariffs, pursuing policies that allow the Bank of Canada to continue its path of reducing interest rates, and transformative policies that directly address the predicament Canadian businesses and households face.
A first step to support employment and business, suggested by Ivey’s Prof. Schotter, that Ottawa and the provinces would be wise to start on now is a $5-billion-plus “Strategic Industries Fund, fast-tracking approvals for critical manufacturing projects, and reforming the Competition Act to allow strategic domestic consolidation … [and providing incentives for] essentially doubling down on non-physical digital and service exports.”
If there is a glimmer of hope in these dire circumstances it is that most bank economists and stock markets, which have continued to climb higher after Mr. Trump’s election, don’t believe a trade war of any length or depth is likely after the new administration takes office.
Hope, however, will not pay the bills if U.S. tariffs come to pass. Neither will retaliatory tariffs.