U.S. President Donald Trump speaks during a meeting in the Oval Office on Wednesday.Evelyn Hockstein/Reuters
Perhaps you’ve heard about the new federal sales tax that will take effect next week, the one that will inflate the costs of a narrow range of products and, as such things do, hit the poorest households the hardest.
No? Then let us rephrase: Perhaps you’ve heard about the retaliatory tariffs that are to kick in on Sept. 8, the Carney government’s response to the latest round of tariff bullying from Donald Trump’s White House.
“Retaliatory” has a satisfying ring of defiance to it, but the inescapable economic reality is that Canadians, not Americans, pay the bill for that retaliation, for the most part. The economic case for retaliatory tariffs is – zilch, nada, zero, nothing.
Sure, some jobs and businesses will be shielded, but only at a much greater cost to the wider economy. Over the long run, more jobs will be lost (or not created) than saved. Over the long run, more businesses will fold, or never exist, than will be saved.
In an analysis for The Hub, University of Calgary economist Trevor Tombe estimated that the soon-to-be-enacted tariffs will cost Canadian consumers close to $4-billion on an annualized basis, although that full effect might take a few months. (Prof. Tombe’s estimate doesn’t include the damage from the increased cost of capital goods to business, or the hit to Canadian exports to other countries, such as Mexico, from rising input costs for firms.)
According to Prof. Tombe’s calculations, households with annual income under $30,000 would on average lose more than 0.5 per cent of their disposable income to retaliatory tariffs, more than three times the proportion for households with at least $150,000 in annual income. That is hardly surprising: Tariffs, since they tax consumption, are inherently regressive.
The United States is wrong to think that tariffs are a path to prosperity. Economics, and history, prove otherwise. The same logic applies to Canadian tariffs, even if the motivation is much different.
A retaliatory tariff is a tax on prosperity, pilfering from tomorrow’s growth to prop up the economic status quo. So Canadians should be under no illusion that the retaliatory tariffs that come into effect on Tuesday are some kind of vengeance being rained down on Mr. Trump.
To sum up: Canadians will have to pay to shield domestic firms from U.S. competitors (who are in turn being shielded by U.S. tariffs paid by American households). And the poorest Canadians will feel the most painful pinch.
So, is the Liberal government wrong to enact retaliatory tariffs? Our answer is a (qualified) no.
Four takeaways from Canada’s tariff counterpunch
In a normal trade spat, there would be little upside to retaliatory tariffs, particularly given the disparity in size between the U.S. and Canadian economies. But the current trade dispute is anything but normal, bound up as it is in Donald Trump’s Manifest Destiny-fuelled fever dreams.
There is no economic case for retaliatory tariffs, but there is a limited (and time-limited) political case to be made.
First, retaliatory tariffs speak to Donald Trump in a language that he understands. Ottawa wishes to underscore that it will not accept the terms on offer from the Trump adminstration – terms of surrender – and that this country is willing to endure economic pain if needed. Retaliatory tariffs are a punctuation mark at the end of that message.
They are also a message to businesses – and voters – in border states, many of which also hold swing-state status. It’s true that the size of Canadian tariffs is simply not large enough to, arithmetically speaking, derail any state’s economy.
But there will be some businesses in some states that will suffer greatly. They will speak up. Republicans will fret: the experience of provincial liquor bans has proven out that theory.
And midterm elections loom. The Canadian government, of course, should have no position on who should prevail in those elections. But it is very much in this country’s interest for American politicians, in both parties, to be fully aware of the consequences of Mr. Trump’s trade war. And for voters to be fully aware of which candidates are prepared to break with the President and call for an end to the mutually assured, and futile, destruction of a trade war with Canada.
A new Congress that is willing to enforce U.S. law and to halt Mr. Trump’s trade tantrums: that is retaliation worth pursuing.