There has been such a flurry of news about President Donald Trump’s threatened tariffs on Canada that it can make your head spin.
Broad-based tariffs, reciprocal tariffs, steel and aluminum tariffs, auto tariffs — it seems like the Trump administration is threatening to impose one tariff after another on Canada and other parts of the world, and it can be hard to keep up.
To try and make sense of what is going on, SASKTODAY.ca turned to Jason Childs, professor of economics at the University of Regina, to help explain what these tariffs are and what the impacts could be. It was his thoughts there could be some serious damage inflicted on Canada’s economy
“I think the Bank of Canada’s estimates are probably pretty close, as good as anybody else’s, if not better,” Childs said.
Childs was pointing to the Bank of Canada predictions that there could be a serious two-year recession if the tariffs come in.
“Again, Canada exports somewhere on the order of 25 per cent of its GDP. So one quarter of everything we make leaves the country. 70 per cent of that goes to the U.S. So if that gets cut in half, that’s a huge bite of economic activity in Canada. So that could knock 10 percentage points off our GDP. If it gets completely shut down. Now, even 25 per cent tariffs won’t completely shut that down. But we’re looking at a recession on the magnitude of ‘91.”
For those who experienced the 1991 recession, that doesn’t sound good at all
“No, that was a very deep, nasty recession. And one of the things that Tiff Macklem, the governor of the Bank of Canada… was trying to make, that I think he’s correct — there is no bounce back. There is no steep recovery from this the way there was in the ‘91 recession.”
Normally, Childs said, in most recessions in the last 70 years or so, you get a sharp economic downturn followed by a recovery and activity that exceeds the trend.
“The modelling they’re doing at the Bank of Canada and other places suggests the bounce is unlikely. It’s a permanent lower growth path is what their modelling suggests.”
The background
With that grim prospect in mind, how did we get here?
“There’s a lot of noise, and so it’s really challenging to differentiate signal from noise,” Childs said.
“Tariffs are something Trump has talked about even in his first term and used in his first term, both on China and on Canada. When you look at some of the people around him and some of the things they’re writing, and I’m talking about some of the more economic advisors, they make an argument for tariffs that cannot be entirely rejected on its face.”
There are a couple of reasons for that in particular, Childs explains.
“One, Canada has a much higher overall tariff barrier — set of tariff barriers — than the U.S. does. The U.S. has an effective tariff rate of about three per cent; we’re at about eight per cent. So, there’s some differentiation there.
“There’s also the effect of the U.S.’s role as a reserve currency and what that means for its exchange rate, essentially meaning that the U.S. dollar is overvalued, which makes their exports less competitive than our imports. So, our exports to the U.S. become more competitive for that reason, and their exports to us become less competitive for that reason.
“I think the effect is pretty small. I’m not totally convinced how much of that is there, but that is part of the argument that’s getting made.”
Since Trump took office, it seems as if tariffs have made a big comeback. During the 1980s, Prime Minister Brian Mulroney was able to conclude a historic free trade agreement with the USA. Then in the 1990s it expanded into NAFTA with Mexico included.
But then Trump won the White House in 2016 running against the departure of manufacturing jobs to other countries. After he took office, the tariffs started coming in and trade deals started being renegotiated.
Childs points to the impact of globalization of supply chains, combined with automation, leading to a “real reallocation of that sort of manufacturing sector out of North America and other jurisdictions, and that’s had an impact on the U.S. particularly.”
“I mean, the resistance to globalization is not new. I mean, you had the riots at G7s for years and those kinds of things. What’s different about the resistance to globalization right now or the objection to it is it switched sides. The resistance, if you think back to the 90s or early 2000s, was predominantly from the left. Now we’re seeing the left, particularly in the U.S., being very, very pro-free trade. And the right, the mega-Republican right, being much more free trade skeptical.”
What kinds of tariffs Canada could face from the USA
So what can we expect with tariffs on Canada? The first set of tariffs set for March 4 are the 25 per cent tariffs on Canada and Mexico, which had already been pushed back a month.
If that comes to pass, Childs says, “the U.S. tariffs will be incredibly damaging to the Canadian economy. We’ll see production fall off in our export sectors, and that’ll cascade through the system fairly quickly.”
He thinks manufacturing will take the biggest hit.
“It’s going to hit any of our manufacturing. I will be really surprised if agricultural products are hit, particularly potash. I would be really surprised if there wasn’t a carve-out for fertilizer, just because of how big and powerful the farm lobby is in the U.S.
“That said, you’re looking at all kinds of manufacturing, a lot of minerals, and I think it’s going to be particularly devastating to Ontario if it applies to automobiles and automobile parts, because a lot of stuff moves back and forth across that border in the process of getting stuff finished. I think you’ll see a continuation of the shift of manufacturing from southern Ontario to the U.S.”
As for how Canada can respond, there are threats from the federal government of counter-tariffs being imposed in response and of an all-out trade war erupting.
But Childs cautions there is “a lot of economic research that shows that smaller trading-based economies engaging in a trade war is incredibly damaging to that smaller economy, and often not a great idea.
“That said, there’s national pride wrapped up in this and all kinds of other things, and the possibility that we might be able to convince the U.S. that a change in policy is in order. I’m not sure how likely that is, but it’s a possibility.”
Another separate set of tariffs that the U.S. is looking to impose, on Canada and other countries, are steel and aluminum tariffs. Childs notes this is something Canada has faced from Trump before.
“That was something that was done very similarly in the first Trump administration, and the justification ostensibly is national defense,” Childs said.
“There’s a fair bit of logic to that in that you make tanks and warships and things like that out of steel and aluminum. You kind of need your own industry. You don’t want to be dependent on a foreign power for those. That said, I’m not sure that Canada is ever going to say no to the U.S. in terms of supplying steel or aluminum. But that’s the argument there.”
As for the 25 per cent broad based tariffs set for March 4, Childs notes the argument for those that’s “still officially being made — we can debate whether or not that’s the actual reason — is about border control, border security, and things passing back and forth over those borders that we don’t want passing back and forth over those borders. Fentanyl, illegal migrants, drugs generally…
“So we’ve got to be careful. We need to be thinking about them as being related but different. So the U.S. really wants to give a boost to its steel industry, particularly as the world becomes less settled.”
Another Canadian tariff target from Trump is likely to be automobiles, with Canada home to several U.S. automotive manufacturing plants.
On this point, Childs points out Canada and the USA have a long history of free trade with respect to automobiles.
“We all have to remember, and I hope somebody’s reminding the U.S. of this — the free trade in automobiles and automobile parts between Canada and the U.S. actually predates the U.S.-Canada free trade agreement, never mind NAFTA. The Auto Pact is an ancient agreement in modern political terms, and it worked really well for a very long time, particularly for us. That said, I don’t know what they’re going to do, and that’s, I think, part of the negotiating tactic.”
On that point, there is plenty of talk that all of the tariff posturing from Trump is building up to a wholesale renegotiation of USMCA in the near future. The agreement is due to come up for renegotiation in any event in 2026, but we could see those moved up.
“I think that’s definitely in the mix,” Childs said. “I think in part, a chunk of the U.S. is very bothered by supply management, the protections that we put in place around supply management, particularly for dairy. And that is one industry that we’ve consistently said we’re going to protect.
The other thing he points to are some federal policies that have come in regarding digital services.
“So tariffs are not the only trade barriers, right? You can have Canadian content rules like we do for broadcasting. That’s a trade barrier. You can talk about the digital services tax and the remarkable impact that may have on streaming services. It may not. We’ll see. But there are a number of other policies that are in play here in this discussion.”
The potential impact on production
Compared to the rest of the country Saskatchewan is less dependent on trade to the U.S., but even so Childs notes “we’re not going to be able to avoid this.”
He notes it is about 50-54 per cent of Saskatchewan exports going to the U.S. compared to about 70 per cent in the rest of the country.
“But that said, there are still lots of industries where we’re really tied into what’s going on in the U.S. And if we lose or we have to reduce the prices we receive for our products in the U.S., that’s going to take a big bite out of what we do here.”
If a full-blown trade war indeed comes to pass, Childs predicts we could production “move permanently to the U.S. It won’t just be that factories are shuttered. It will be that equipment moves south.”
He points to 2014-15 when the price of oil collapsed, with changes in the rules around oil production in Canada and rigs leaving Alberta and Saskatchewan.
“They just leave. They go south. They go to Texas, they go to Oklahoma, they go wherever. And they never come back. Investment, when you look at the data, investment in this country, gross capital formation that is, has not grown meaningfully since 2015. We’re still at about 2015 levels in terms of real investment spending in this country.
“That’s not a good place to be. And getting into a trade war, even if it’s not our fault, getting into a trade war is going to be very, very damaging.”
The other damaging thing that Childs points to is the “misinformation” that consumers always pay for a tariff. “That’s not entirely true.”
If 25 per cent tariffs are put on Canadian goods, it wouldn’t be just the U.S. consumers feeling the brunt. It could also be the Canadian suppliers, too, who might have to take a hit of their own.
“U.S. purchasers, U.S. refineries, particularly in the Midwest, could potentially demand that we charge 25 percent less for oil. And we’d have to take it,” said Childs.
“It won’t be full. It won’t be we’ll pay the full 25 percent, and it won’t be they’ll pay the full 25 percent. The burden will be shared, and it probably won’t be shared equally. So the idea that this is just a tax on the American consumer is not accurate. It’s a tax on both Canadian producers and American consumers.”
Canada’s options
So then the question becomes: what tools does Canada really have at their disposal if the tariffs do come to pass?
“Short term, not very many,” said Childs. “This is one of those things where you’re just going to, either we can try and fight back, and try and make it as painful on the Americans as possible to convince them to stop punching us. I’m getting a little flippant here. But if we make it painful enough, we might be able to convince them that this isn’t a great strategy. But we are going to endure more pain than they are. We just have to hope their pain threshold is lower.”
“That’s short term. That’s if we want to fight back. I think the diplomacy we’ve been attempting to do particularly at the provincial level, I think that’s had some benefits. Hopefully it can continue and hopefully we can get the federal government that’s seriously engaging in diplomacy as well. I think that has been utterly absent in the last 30 days or so.
“Longer term, we need to – and the time to have done this was 20 years ago, right? We need to diversify our trade portfolio. We need to be less dependent on the U.S. And that means building infrastructure that runs east-west, not north-south. Pipelines, rail – I’m a big proponent of expanding rail capacity. I think that has a lot of merit. We’ve got to start trading with ourselves more.”
All in all, it’s a grim outlook for both Canada and the USA if this tariff situation isn’t settled soon. Childs is hoping some common sense will prevail among those in charge.
“We need some serious adults in the room on both sides of the border because this isn’t going to get us anywhere good.”
