Donald Trump’s tariffs on Canadian imports will ultimately fail. But they’ll do a lot of economic damage before that happens.
That’s the conclusion of economist and public policy advisor Hendrik Brakel in a report published last week by the Macdonald-Laurier Institute and the Center for North American Prosperity and Security.
Titled From Trade Wars to Trade Wins: Securing Canada’s Economic Security in the Trump Era, the paper lays out a comprehensive road map to shield Canada’s economy and position it for long-term success.
In his report, Mr. Brakel describes Canada as “rudderless” as the Liberal Party chooses a new leader and Parliament has been prorogued until March 24.
“The Prime Minister is not able to confront a tariff crisis with significant new spending, supports for business, or added security measures,” the report says. “All he can do is tweet indignantly, threaten retaliatory tariffs, deliver speeches (lamenting Kamala Harris’s loss and declaring himself a “feminist”)…The crisis can only get worse in the months ahead with a rudderless Canada unable to respond and a trade-focused US president sensing weakness.
Despite Canada’s vulnerable position, any tariffs will eventually fail, says the author, for these reasons:
1. Tariffs are paid by the importer (despite what Trump says), which means the financial burden will fall on U.S. industries and consumers.
2. Tariffs will lead to massive inflationary pressure. The Bank of Canada confirmed last week that would be the case in this country, but the higher costs of imported goods would also be felt in the U.S. Some projections suggest U.S. gas prices could increase by as much as $0.75 a gallon if oil is not exempted.
3. Trump’s assumption that businesses can easily repatriate to the U.S. is “very questionable”. It’s not easy to simply pick up a billion-dollar manufacturing facility and plunk it down in the middle of Ohio.
4. Tariffs will ultimately hurt U.S. competitiveness by increasing the cost of inputs.
5. Tariffs are a poor source of revenue because of the broader distortion and dampening of markets and productivity they cause.
But no one knows how long it will take for all these effects to filter through to the U.S. economy and for the administration to realize the plan has failed and climb down.
In the meantime, the damage will be severe. Citing a Deloitte study, Mr. Brakel explains that a 25 per cent U.S. tariff on Canadian exports could cost the economy $275-billion in GDP by 2030, along with 222,000 job losses.
“Canada’s current approach is inadequate in the face of these challenges,” he writes. “We need a bold, strategic vision to secure our economic future.”
He sets out three policy goals Canada should follow to get through the current situation and prevent a future repetition.
Fortress North America: Strengthen economic and security ties with the U.S. through mutual regulatory recognition, freer movement of goods and services and enhanced military co-operation. “These measures would solidify Canada’s place in the North American economic and security architecture,” he says. Of course, this requires U.S. co-operation, something we’re not seeing from Washington right now.
Global competitiveness: Mr. Brakel says we need to “make Canada the best place in the world in which to invest and build a business”. This would involve dramatically reduced taxes and the development of an industrial policy for strategic industries.
“Industrial policy should not be seen as a bunch of subsidies for favoured industries,” he writes. Instead, Canada’s industrial policy should include a major overhaul of its patchwork of regulations and tax policies that are now making it hard to do business there: Canada must lower taxes and lower energy costs, make regulations business-friendly, create better incentives for R&D, make real investments in the supply chain and infrastructure and improve competitiveness. The Trump administration will cut taxes and regulation drastically, so Canada must move aggressively to avoid being left at worsening competitive disadvantage”.
Combat global trade abuses: We must lead efforts to counter unfair trade practices, particularly from China, while championing a rules-based global trade system to ensure fair competition for Canadian industries.
“This is a once-in-a-generation opportunity for Canada to transform its trade policy,” Mr. Brakel says. “By embracing reform, we can secure our economic sovereignty and ensure a prosperous future for all Canadians.”
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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