Canadian economist Vincent Geloso has released an excellent piece with the Montreal Economic Institute about why retaliatory tariffs by Canada against the United States are a bad idea.
This line, especially, is worth pointing out: “As a consolation, it is heartening, at least, to realize that free trade rhetoric still has a sizable constituency in Canada.” I agree with Geloso. It has been encouraging to see Canadians rallying around the importance of free trade, and warming up to freeing up inter-provincial trade and diversifying our trade partners. One would hope this affects other policy debates in Canada that lean more towards protectionism, specifically supply management of dairy, poultry, and eggs.
Although public sentiment has leaned toward opening our trade so that Canada can be less reliant on the United States, there is still strong support towards the idea of retaliatory tariffs. As Geloso points out, it’s understandable.
As I discussed in my latest television appearance on The Hill’s D.C. morning show, when a long-time friend starts talking about you like you are taking advantage of them when you both know that isn’t true, your first instinct would be to retaliate.
The problem, however, is that Canada ends up cutting off its nose to spite its face because tariffs are a tax on your own people. By imposing tariffs in retaliation, you are condemning your fellow Canadians to pay higher prices for everyday products that they need, like groceries, housing, and clothing.
The Poorest Will Pay
As a consumer advocate, it pains me to see my fellow Canadians have to pay so much more and have so much fewer choices as a result of tariffs and counter-tariffs.
I am especially concerned by how much low-income Canadians will suffer as a result of higher prices, especially when more than 50% of Canadians are already $200 away from being unable to pay their bills. Geloso also points out that raising the cost of imported goods reduces expert competitiveness and makes collusion easier between national firms, creating yet more unintended consequences. The resulting lowering of specialization and scale of manufacturing then directly contributes to lower economic growth.
On collusion, Geloso shows that government protectionism incentivizes interest groups to ratchet up the lobbying for their industries. This is a scenario that won’t pan out well for consumers. The money poured into seeking protections only takes money away from productivity, and consumers get the short end of the stick in terms of lost innovation and the delaying of new and emerging products at a reasonable cost. It also pushes up prices for consumers significantly.
The real worry, as Geloso points out, is that “as businesses line up to ask for their own share of the spoils, the counter-tariffs get harder to repeal and may become a permanent drag on economic growth.” We don’t have to look further than the protectionist policy of supply management that protects dairy, egg, and poultry farmers at the cost of making products much more expensive for consumers.
The supply management lobby is one of the most powerful in Canada, influential enough to halt entire trade negotiations from countries like the UK and Australia, where there is a concerted attempt to diversify trade away from the United States. The last thing we need is more of that bad policy in Canada.
The Historical Lessons
Geloso offers Canadians a stark warning for the future rooted in the past. During the Smoot-Hawley tariff affair of the 1930s, Canada retaliated on about 30% of U.S. exports to Canada. Not only did these not change American tariff policy, but it led to Canada’s trade share falling by roughly one third during the Great Depression.
“The collapse in traded-goods prices, interacting with domestic wage rigidities, can account for roughly half of Canada’s Great Depression contraction,” writes Geloso. “The counter-tariffs certainly contributed to some part of this, and made the Great Depression worse than it otherwise would have been.”
Not only are tariffs a tax on your own people, but the historical lessons demonstrate they have long term and harmful effects on consumers.
As the second-largest American trading partner after Mexico and the largest national customer for many states, Canadians are right to be angry at souring trade relations with the United States. Canada is also the largest provider of U.S. energy imports, which cannot be easily replaced.
This trade war must end because we both need each other. The beauty of free trade is that everyone gets to specialize, competition is strong, and relationships are forged through good times and bad. None of this is true during a trade war, and the effects on consumers are dire.
Work by economists like Vincent Geloso’s excellent piece for the Montreal Economic Institute are imperative to the tariff conversation in order to remind people that beyond taxing your own citizens, tariffs have far reaching negative effects that will likely be felt years into the future.