The Ben Mulroney Show - Ben finds out how much financial pain we're in for with this Tariff War

Episode Date: February 3, 2025

Guests and Topics: Guest: Frances Donald, RBC’s Chief Economist  Guest: Gary Hufbauer, Economist Senior Fellow of the Peterson Institute for International Economics If you enjoyed the podcast, tell a friend! For more of the Ben Mulroney Show, subscribe to the podcast! https://globalnews.ca/national/program/the-ben-mulroney-show Follow Ben on Twitter/X at https://x.com/BenMulroney Enjoy Learn more about your ad choices. Visit megaphone.fm/adchoices

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The level of cooperation, the level of effective partnerships between our two countries that have been established over decades and generations means that this trade action by the Americans and our response is going to have real consequences for people, for workers on both sides of our border. So I have enough knowledge to sit here and tell you that these tariffs are going to hurt. That's where my knowledge base ends. So my next guest is going to drill down and really get into the nitty gritty to give you the information that you need. Please welcome Frances Donald, RBC's chief economist to

the Ben Mulroney show. Thank you so much for being here. Thanks for having me. So we know they're coming and we know they're going to hit hard. Frances, tell me when are we going to start feeling the pinch and where are we going to start feeling the pinch first? Yeah, you know, that's the problem is we know they're coming. That's supposed to be true. But just a couple of minutes ago, Mexico managed to delay their tariffs. And so a lot of when they're coming and if they're coming is being determined by folks in Washington that economists don't have a lot of insight into. And how impactful they are actually isn't just about the policy.

It's about a range of other factors as well. If we see a really big decline in the Canadian dollar, that will make the price increase for Americans less difficult, and it might not hit Canada as badly. If we see a Bank of Canada that says, we want to help Canada here, we're going to cut rates a lot faster. Or governments at the provincial or federal level who come in with support packages, then that'll take the sting out of this as well.

So there's a lot of moving factors that go into assessing just when and how Canadians will feel this impact. But the difficult part of it is that no matter how you slice it, we're probably looking at slower growth in 2025 and some slightly higher prices and Canadians could start to feel that pretty soon in a matter of weeks on things like produce or anything that's difficult to hoard inventory over. I don't see a lot of folks, for example, hoarding lettuce.

So we wanna provide some guide rails or guard rails for Canadians, some signposts of what they should be watching for. But the good news is there are some mitigating factors that Canadian policymakers can take that might be just as important as the actual tariff policy itself. Well, let's talk about those. What are some things that the powers that be could could bring to bear to make the sting a little less tough? Well, I would be watching the Bank of Canada. They were already cutting interest rates

and we felt they were on their way already to cutting interest rates down to 2% for 2025. They may go more quickly. And you may see some signs from Governor Macklem that even before their next meeting in mid-March that they're ready to stand guard and be part of the Team Canada response. We've heard various politicians at the provincial

and federal levels talk about things like pandemic era support. Now this isn't the pandemic, we have to be clear about this. It's not a pause and unpause button on our economy. And most of what happens next is determined by politicians over case numbers. But it is similar in the sense that it's out of the business cycle type of impact that isn't Canadians' fault and maybe they deserve some sort of support along the way. The problem for Canada

is that rainy day fund, it's maybe not as big as many would have hoped for. And perhaps more importantly, Canada is one of the only, along with Mexico, countries that's dealing with this really big economic shock. In the past, we've benefited from really being the cleanest of the dirty shirts when it comes to government finances. Canada is usually leading the pack,

even though we put a lot of pressure on ourselves to do better. Now, Canada is going to have to effectively go it almost alone and spending government money and that that's going to limit how much there is to spend on a go forward basis. Francis, are there sectors of the economy that will feel let's assume for a second that we don't get a deal and the tariffs come in but are there certain sectors that are going to feel this more than others?

Absolutely. Manufacturing, manufacturing in Canada, which by the way, is pretty significant. It's about 9% of growth. So let's round it out and say one out of every $10 of growth in this country comes from the manufacturing industry. And it's very interlinked with our US neighbors. Sometimes we have car parts that go back and forth between the US and Mexico up to eight times. If you think about a tariff applied every single time it goes into the US, you're actually talking about multiple tariffs on top of something like potentially a motor vehicle coming through. We know that the top 15 manufacturing sectors, they employ 3% of Canadians, and so those Canadians are probably looking right now

to get a sense of what is the duration of this tariff policy, is it a couple of weeks? Then it's probably a pause or a hiccup, but if it starts to lean over three months, we have concerns that this bleeds into a broader recession in Canada. Again, there's a lot of ifs around that, but it becomes more problematic.

One thing I'd note though is if you think about a simple example of a manufacturing plant in a town, for example, you might think if that manufacturing plant starts to slow down or if people are left unemployed, then they're less likely to go to movie theaters or out to restaurants. And that's how a shock applied to maybe a good sector manufacturing turns into something more problematic for the broad economy. And so we don't want to be alarmist or talk about the negative side, because they do have a lot of optimism about what Canada's economy can be. But the flow through and the tentacles through the economy are very difficult to measure and come with sort of a range of assumptions we have to make.

to measure and come with sort of a range of assumptions we have to make. And is there, I mean, we're looking at the negative aspects of these tariffs, but are there certain parts of the economy that could see, that could flourish under this new regime? Well, that depends what our attitude is towards it. I mean, for a couple of years now, actually, for 40 years, economists have been saying Canada has very low productivity. So basically its ability to produce things more quickly or more efficiently has been very low compared to its US peers.

So there's been some commentary lately about whether or not this is sort of a so-called wake-up call for Canada when it comes to how it could start diversifying its economy more, or just becoming more reliant on itself relative to always focusing on its US trade relationship. I think that's something that we really take advantage of and of course why wouldn't we? So now we're talking about what the government response could be and while there's going to be a lot of focus on the short

term government response, how do we help folks who lose their jobs as a result of this? Again, if the tariff policy remains in place, it's going to be a lot of questions about what kind of investment we want to make in the future Canadian economy and what does it look like? We have an enormous amount of natural resources. That's not just energy.

Everything from uranium and nickel are really critical minerals that Canada can produce for the rest of the world. A tremendous agricultural base. But most of the economic conversation in Canada has been focusing on housing, for example, for the past couple of years. We've forgotten about this phenomenal blessing

that is our natural resources sector, how wide-ranging it is and how much the world needs Canada. That conversation is really being laid bare right now as we think resources sector, how wide ranging it is and how much the world needs Canada. And that conversation is really being laid bare right now as we think about a short term pain. Maybe there'll be some additional motivation to focus on these longer term investments for Canada and what lies ahead. Well, Francis, we just heard from the Canada Bureau Chief of the New York Times who said senior Canada government officials tells me the situation is in flux for Canada

after the Trump Trudeau call this morning and ahead of their follow-up call at 3 p.m. But they are not optimistic that a real off-ramp from tariffs exists for Canada the way it materialized for Mexico. I tell you, Francis, if Mexico is able to get a deal and Canada doesn't, heads should roll. I don't know how this is. Well, I think maybe the issue is we don't, it's really not clear what the United States wants

specifically from Canada. They've talked about fentanyl, they've talked about immigration, they've talked about Arctic security, they've talked now about a variety of other things. So it's not like we have a clear prescription. We gotta leave it there. Thank you, Francis.

Donald RBC's chief economist. Welcome back to the Ben Mulroney show. And now that we know that these Trump tariffs are coming in 25% across the board with a tent with a carve out for oil, which is going to be hit with a 10% tariff, people are lining up to give their opinions and Mitch McConnell, Republican Senator Mitch McConnell, Republican Senator Mitch McConnell, went on 60 Minutes and you might think he would be in full support and walk in lockstep with Donald Trump. You'd be wrong.

What about tariffs against our allies? It will drive the costs of everything up. In other words, it'll be paid for by American consumers. I mean, why would you want to get in a fight with your allies over this? Yeah, and you know, it speaks to sort of the ripple effects, the knock on effects of these tariffs. Where are we going to feel reverberations from Trump's decision next? Joining us to discuss just that is Gary Huffbauer economist, senior fellow of the Peterson Institute for International Economics. Gary, thank you so much for being here. Thanks. So this is the the implications of these

tariffs are far and wide reaching. Where are we going to feel this next? Well, we already felt it in the stock market. Stock market's down sharply today. That's not a vote of approval for Trump. As Senator McConnell said, he's quite right on this. The price are going to go up. They're going to go up for the U.S. cost the average household, probably $1,500 a month in the U.S US when these flow through.

Beyond that, and of course, Canada and Mexico will surely suffer. I'm expecting a recession in both countries during this year as a result of these tariffs. But the broader effect is this totally upsets the post-Second World War order, which we've seen, which had been very productive for a lot of people,

enriched all of us in North America, but Europe, Asia, other countries as well. And, you know, there are no more rules. If the US can do this, you know, what is the value of any trade agreement, any commercial agreement? So that's terribly devastating to the whole world order in the economic sphere.

But also as Senator McConnell said, it upsets the US alliance system. I mean, my goodness, Canada has been a military ally of the US since the first world war. So it's unbelievable. Gary, there's talk that China is going to bring this up at the World Trade Organization and challenge Donald Trump's right to do this. We've also heard that there

may be a court challenge in the United States to this because Donald Trump, you could argue, is going against the very treaty that he signed, the NAFTA 2.0. What do you think of those avenues to pursue? Well, unfortunately, thanks to what was done in the first Trump administration and continued by the Biden administration, the WTO has very little clout today, in terms of issuing our society opinions. That's unfortunate, but that's the reality.

And secondly, you asked about the US courts. Yes, this will be challenged in the US courts because this talk about fentanyl in the White House executive order is all just a pretext. But I've looked at these statutes in depth over the years, and unfortunately, they give the president all sorts of power. And I do not think the US courts will reverse him. That's again, unfortunate.

So I think the reversal will come through two forces, if it comes at all, Italian, by other countries, and the stock market. Now, Gary, we've heard that Donald Trump has been musing with the idea of abolishing federal income tax. And that would be one side of the coin, which a lot of people believe he would simply be replacing the income tax with tariffs, which are essentially a consumption tax. What do you make of that?

Well, it's nonsense. The money isn't there. It's just not, you know, you could put 100% tariff on all the US imports, which are about a little over $3 trillion. And if the import didn't disappear, that'd be 3 trillion trillion that's not enough to fund the federal government i mean it just it makes no sense the arithmetic is completely nuts so that's not going to happen he might cut back the income tax a little bit but certainly not replace them and not in any big way you know we're spending a lot of time talking about the impact that these tariffs will have on life here in Canada.

But, you know, it just it just occurred to me that the Americans are going to feel the impact of Canadian tariffs, Mexican tariffs and ultimately Chinese tariffs as well. That's going to happen. That's that's going to hurt. Oh, yes, it does. If you take all this together, as I said, it's gonna take about $1,500 out of the average household every year. And it'll be noticed particularly in price spikes

for particular goods. Oil, even though he's talked about 10% carofon oil, that will still show up at the pump. Things like cherries, blueberries, so forth, that'll show up avocados, lettuce, tomatoes. A lot of things will show up that people, ordinary Americans who don't follow this trade stuff, they'll notice it.

Yeah. And they won't be happy about it. Yeah, and the automotive industry is gonna grind to a halt. These are all things that run counter to what Donald Trump promised. He said, when a lawyer grocery bills, we're going to bring back manufacturing. It just it boggles the mind that that he

has embarked down this path. Yes, it's quite contrary to what he's promised. And it'll probably start with those auto factories in Michigan. You know, with this 25% tariff, you're gonna not be able to get the parts that you're accustomed to. Maybe it'll be doubled up as the parts go back and forth. That remains to be seen.

There have been contradictory remarks there, but auto parts are gonna be more expensive and autos will be more expensive. And there'll be loss of employment in particular plants which were exporters, U.S. exporters or depended on on imports apart from Canada or Mexico. So it doesn't it does not comport with the with the people that he got to vote for him. Yeah well let's talk about the people he got to vote for him. Yeah, well, let's talk about the people he got to vote for him because on our West Coast,

the Premier of British Columbia has said that he wants to target tariffs on red states so that the representatives who have his ear will be able to tell him how disproportionately they are being affected and his voters are going to feel the pinch faster than anybody else. He's got long coattails right now,

but they're gonna shorten up right quick. Oh, yes, yes. Yes, those senators and Republican congressmen from the red states, the Midwest, but some of the industrial states, Ohio, Michigan, they're gonna feel the pain. And they may part company just like Senator McConnell did. I mean, it couldn't be wetter than Senator McConnell,

but I do think, as you said, coattails were shortened, particularly in the House, House of Representatives. Republicans have a very narrow majority. And of course, those elections are in two years. And if you don't have a glowing economy in two years from now, a lot of those Republicans will be swept out. Gary Huffbauer, thank you so much for giving us that global perspective on this problem. We appreciate it.

Thank you. Yeah, I think we got time for this. Let's play Pierre Poliev and what he said yesterday. Well, I believe we're already in a trade war and I believe no one will win. I think both countries will lose. And that's my message to our American friends, why? Why would you want both of our countries

to lose a trade war when we have the most successful trading, security and geographical relationship that any two countries have ever had in the history of the world. Why would you want us to lose, both of us? Because that's what's going to happen. This will make America poorer, weaker and less safe. Will Canada lose? Of course, we're both going to lose. So let's stop losing on both sides of the border. Let's hammer out our differences and actually trade more. That would be a winning solution to all of this.

And that is the message that I will bring as we put Canada first. We're the most important stories from around the world. We are here in Jerusalem. first. Go, go, go. Watch Canada's number one national newscast. A rail strike could cost this one Southern Alberta farm as much as a million dollars. The award-winning Global National with Donna Friesen.