RAMIFICATIONS OF U.S. TARIFFS FROM A CANADIAN PERSPECTIVE

Strategic Implications

The imposition and threat of tariffs by the United States has long been a tool of economic diplomacy and a source of tension between trade partners. With the new Trump administration, it looks like we will battle them for some time.

The ramifications are significant for Canada. This blog post explores the implications of U.S. tariffs from a Canadian perspective, highlighting the challenges and the strategic maneuvering behind tariff threats.

Understanding U.S. Tariffs and Their Context

Firstly, what is a tariff?  It’s a tax imposed on imported goods.  Trump is, in effect, taxing his own citizens to force them to buy U.S. goods manufactured in the country.

Typically, tariffs are used to protect domestic industries and gain leverage in trade negotiations. Former President Donald Trump used tariffs extensively during his first Presidency, particularly on goods from China. While some of those tariffs remain in place, new tariffs— targeting Canadian industries along with Mexico — have emerged as a key bargaining chip in U.S. economic strategy.

The Downside of U.S. Tariffs for Canada

1. Economic Impact on Key Canadian Industries

Canadian industries like steel, aluminum, agriculture, and energy are highly vulnerable to U.S. tariffs. Tariffs in 2018 resulted in significant financial losses for Canadian manufacturers.

As Canada exports approximately 75% of its goods to the U.S., we’ve got a major problem. U.S. tariffs will lead to:

• Increased production costs, as Canadian companies may need to find alternative markets or absorb higher taxes.
• Job losses, particularly in sectors heavily dependent on exports.
• Economic slowdown, as tariffs disrupt cross-border trade and supply chains.

2. Strained U.S. Relations

Canada and the U.S. have enjoyed one of the closest relationships in the world. However, tariffs are straining this partnership, leading to retaliation. Retaliatory measures by Canada, such as counter-tariffs on U.S. goods or an outright cancellation of Canadian energy exports, threaten to escalate trade tensions further, ultimately harming consumers and businesses on both sides of the border.

At the time of this writing, Canadian Premiers such as Ontario’s Doug Ford are still proposing a cessation of all energy exports to the U.S.  If enacted, this could cause significant strain on U.S. Canadian relations as the two countries’ energy infrastructures are deeply intertwined.  Unwinding these relations would take years, not months, and in the meantime, U.S. consumers would see significant energy price increases.

3. Consumer Price Inflation

Tariffs often lead to higher costs for imported goods, which are passed on to consumers. For Canadians, this could mean more expensive American products, from household goods to automobiles. Conversely, American consumers could face higher prices for Canadian imports, reducing demand and further impacting Canadian exporters.

Here are a few of the things currently on the table:

Some Potential (Yet Marginal) Upsides for Canada

1. Strengthening Domestic Manufacturing

Tariffs can encourage Canadian businesses to invest in domestic production to reduce reliance on the U.S. market. This could spur innovation and strengthen supply chains, particularly in critical industries like technology and healthcare.  Realistically, however, benefits are years away.

2. Diversifying Interprovincial and Other Trade Partnerships

The threat of U.S. tariffs underscores the need for Canada to diversify its trade relationships. Canada has already taken steps in this direction, signing agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). Tariffs could accelerate efforts to expand trade interprovincial, with Asian, European, and Latin American markets.

3. Coast-to-Coast Pipelines

The trade dispute has prompted Canadian officials to revisit coast-to-coast pipeline projects.  This is something that should have been done years ago.  Despite the financial, regulatory, and social challenges that temper the likelihood of immediate approval and construction, we’re at least talking about it again.

How Much of This Is Trump Just Bluffing?

The question of whether Trump (or any U.S. leader) is bluffing when threatening tariffs is complex. Last go around, Trump used tariffs as both a tool and a bargaining chip.  He often implemented them after failed negotiations. However, his unpredictability makes it difficult to ascertain his true intentions, which is what he’s likely counting on. Ultimately, he’s expected to take whatever he can get.

1. Tactical Bargaining Tool

Trump’s tariff threats are often aimed at securing better trade deals. For instance, his administration used the threat of auto tariffs to push for concessions during USMCA negotiations. From this perspective, tariff threats could be a negotiating tactic to gain leverage in ongoing disputes over issues like dairy market access, digital services taxes, or border security.

2. Political Calculations

Tariff threats also resonate with Trump’s political base, particularly in industrial states facing economic challenges due to globalization. By portraying himself as tough on trade, Trump reinforces his image as a defender of American workers, even if tariffs ultimately hurt U.S. consumers.

3. Actual Implementation

While Trump has followed through on some tariff threats, others have been pushed back or remained just that—threats. Canada must carefully navigate these situations, balancing the need to protect its industries with the risk of escalating trade tensions.

Conclusion

The potential ramifications of U.S. tariffs on Canada are significant, encompassing economic, political, and social dimensions. The downsides of getting this wrong — such as disruptions to key industries and higher consumer costs—are substantial, while the opportunities for Canada to strengthen its domestic economy and diversify its trade relationships will take decades and, thus, are far outweighed by the risks.

In the long term, irrespective of whether Trump’s tariff threats remain more of a bluff or become a genuine policy move, Canada has chosen to utilize a carrot-and-stick approach by tightening border security as requested while remaining proactive in defending its interests. The alternative is to roll over, take the hit and just wait it out – which could be years or even decades.

Last go around, the tariffs cost Canada about $200B.  This time, we’re looking to navigate this increasingly uncertain global trade environment through a combination of Canadian civility and hardball.  Go Canada, go.