Trump is delusional on tariffs, but Canada shouldn’t retaliate
In 1930, U.S. Congress passed the Smoot-Hawley Tariff Act, with the hopes of calming the great depression, and to raise more revenue for the federal government. To paraphrase the great Ben Stein in the cult classic Ferris Bueller’s Day Off, “Did it work? Anyone? Anyone know the effects?” It did not work and the U.S. sank deeper into the great depression.”
This piece of economic and film history is relevant because it is the road we are about to tumble down.
Donald Trump’s proposed 25 per cent tariff on all imports from Canada is, if implemented, an economic disaster for Canada. According to research published by the Canadian Chamber of Commerce, and the University of Calgary’s Trevor Tombe, a 25 per cent tariff would decrease real Canadian GDP by 2.6 per cent per year, meaning an immediate recession once the levy was in place.
If the tariffs were in place for the duration of Donald Trump’s term in office, real Canadian GDP would decline 10.4 per cent, which would make the COVID-19 recession look like a walk in the park. Then, of course, factor in that Canada is already on the cusp of a recession with GDP per capita declining, and the economic outlook is dire.
The question swirling around Ottawa right now is what will Canada’s response be in the two months before Trump is sworn in. Trump is demanding that we clean up our border, specifically stopping the flow of migrants heading southward, and stopping illegal drugs entering the U.S. from Canada. Regardless of what Ottawa announces between now and Jan. 20, it’s unlikely that either of those two issues can actually be resolved in such a short period of time, which increases the likelihood that Trump will make good on his promise.
Many Canadians, including those in office, are suggesting that Canada needs to consider retaliating against the U.S. if Trump follows through. While one can understand the inclination to “defend” Canadian interests in response to an erratic president, responding with retaliatory tariffs of our own would be economic suicide.
Milton Friedman astutely explained nearly 50 years ago that tariffs do protect domestic consumers very well against one thing. Lower prices. Tariffs make imports more expensive and constrict the supply of goods in the market, which puts significant upward pressure on prices on both fronts. Tariffs are, more simply put, taxes that are paid for by the very people they are intended to protect.
When a government enacts tariffs, it is essentially punishing its own consumers. Should our response to Donald Trump punishing U.S. consumers be following suit and doing the same to ourselves? Absolutely not, especially when you consider that Canada imported $277 billion worth of goods from the U.S. in 2023. Canadian consumers won’t be better off if Canada retaliates and enacts tariffs on the $55 billion worth of vehicles, $38 billion in machinery, or the $14 billion in electronic equipment we import from our neighbours. At a time when food inflation is still a problem, and the rising cost of living is hitting everyone, further boosting the cost of goods from our largest trading partner is backwards and inflationary.
Now, that doesn’t mean that Canada should just lay down and not do everything in its power to avoid this. In addition to begin taking steps to better control the border, there are several issues that have been on the chopping block for Americans, under both the Democrat and Republican administrations.
The first, and most glaring one, is supply management. Ending this program would give Canadian consumers access to international goods, would lower prices by increasing competition, and would solve one of the U.S.’s long held grievances about trade with Canada.
Another would be to scrap the Digital Services Tax, which is essentially a targeted mandate aimed at U.S. companies, which both Republicans and Democrats have despised since its inception.
Donald Trump’s view that tariffs on Canadian products will make Americans better off is a fantasy. The Tax Foundation’s research on his full package of tariffs shows that they will deflate the U.S. economy and cost 340,000 American jobs. The actual impact is likely much larger given that their figures don’t include the impact of retaliation and the downward spiral of trade wars.
So the question is, are we really better off if we try to match Trump’s fantastical delusions? A “Team Canada’ approach is certainly needed, but not one that drifts towards tariffs and protectionism.
Originally published here
