The Decibel - What a Trump re-election could mean for Canada’s economy

Episode Date: October 24, 2024

Republican presidential candidate Donald Trump has said he will impose 10 to 20 per cent tariffs on everything the U.S. imports. This would include, it seems, all of the goods and resources Canada sells to its biggest trading partner. And that kind of tariff wall could have serious effects across the Canadian economy.Adrian Morrow is the U.S. correspondent based in Washington, D.C., for The Globe and Mail. He looked at exactly which parts of the Canadian economy would be hit the hardest, how much each Canadian could stand to lose on average and what Canada is doing to prepare for this possible scenario.Questions? Comments? Ideas? Email us at [e-mail]

The U.S. is our largest trading partner by a lot. According to the most recent numbers from Statistics Canada, we exported $48 billion worth of goods to the U.S. in August. Our next biggest export market was just over $3 billion to the U.K. So we rely heavily on America for trade, which is why some people are concerned about a particular economic policy from Republican presidential candidate Donald Trump.

If you don't make your product here, then you will have to pay a tariff, a very substantial tariff, when you send your product into the United States. To me, the most beautiful word in the dictionary is tariff. I will impose whatever tariffs are required, 100 percent, 200 percent, a thousand percent. And by the way, you know, for years they knocked the word. The word tariff, properly used, is a beautiful word.

One of the most beautiful words I've ever heard. It's music to my ears. Look, I've brought in with tariffs and I was just getting started. Today on the show, I'm joined by Adrian Morrow. He's the Globe's U.S. correspondent based in Washington. He'll explain the potential impact new tariffs could have on Canada, why our current free trade agreement might not protect us, and what Canada is doing to try and soften the economic blow of a possible Trump election. I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail. Adrian, thank you so much for being back on the podcast.

Thanks for having me. So when it comes to tariffs, what exactly is Trump threatening to do if he's reelected? He's basically threatening to put tariffs of between 10 to 20 percent on all goods coming into the United States. So that would sort of be his baseline, 10 percent tariffs or 20 percent tariffs, depending on which of his speeches or announcements you're listening to for all goods. And then on top of that, he has some specific goods in specific countries that he wants to target in addition to that. So he's talked about for China, for example, having 60% tariffs on everything coming into

the United States from China, and then having about 100% to 200% tariffs on all autos being imported from Mexico. In that case, essentially, he wants to put tariffs that 200% tariffs on all autos being imported from Mexico. In that case, essentially, he wants to put tariffs that are so high on Mexican autos that it stops all Mexican autos from coming into the United States. And to be clear, has Trump's team definitively said that these tariffs would apply to Canada as well? No, I've asked them this question a couple of times, and I have not gotten a response. So they have not specifically confirmed that Canada would be subject to the tariffs, but they also haven't ruled it out or talked about exempting trading partners, exempting U.S. allies or anything like that. So for the moment, the promise seems to be that everybody would be subjected to these tariffs. And we've had no word of Canada getting an exclusion. So I think Canadians generally know that we do a lot of trade with the U.S. But can we spell out kind of how big a deal this would be, Adrian, if it happened?

How significant would this be for Canada? About 75% of all of Canada's goods exports go to the United States. And so that includes raw materials that come from Canada that are sent to the States, oil and gas, obviously, metals that are mined in Canada or that are processed in Canada and sent to the United States. It also includes consumer goods that are manufactured in Canada and sold on the U.S. market. And maybe most interestingly, it includes manufacturing supply chains. So parts of products that will be made in Canada, you know, sent to the United States or sometimes sent to Mexico, and then sent back across the border multiple times. The auto industry is the obvious example of this. We might have a car that's essentially manufactured by Canada, the US and Mexico with

different parts of the job and different components made in different countries with these goods going back and forth across the border multiple times before you get a finished car. You know, nobody comes close to touching the US at this point in terms of who's receiving Canadian products. So Adrian, we are going to talk about the specific potential impact on Canada here. But I think first we should just get into some of the reasoning of why you would want to do this, because tariffs are basically a tax on imports right into the country. So why would a country impose tariffs today when there's so much trade happening around the world? Yeah, I mean, historically, the reason for tariffs partly was that in the 19th century, governments didn't tend to collect tax revenue by income tax. And so they

use tariffs as a method for raising money for the government. And they also use them as a way of sort of protecting domestic industry from foreign competition and saying, we're going to make products more expensive to import into our country. And therefore, we're going to give a leg up to people who are producing those things domestically. You know, all of that sort of was exploded during the 20th century. And really in the 80s and 90s, you kind of had this consensus that formed around free trade and this idea that the optimal outcome for every country was to reduce its tariffs to as low as possible, if not to zero, and for everybody to sort of focus on just producing the products and services where they have a comparative advantage and then trading for everything else. In the modern era, you might use tariffs as a negotiating tactic, as a bargaining tool, as a way of basically saying we will reduce our tariffs or eliminate our tariffs on your products if you eliminate all of your tariffs

on ours. So this idea of kind of it as a negotiating tactic, is this how I guess Trump seems to see or how his policies seem to view the use of tariffs? He goes a step further than that. I think Donald Trump not only sees tariffs as a negotiating tactic, I think he actually believes that they are good economic policy intrinsically. He tends to take a view that hues very much to a sort of 19th century or early 20th century kind of economic view on tariffs, that there's an intrinsic good in protecting your domestic industry from foreign competition. And for him, it specifically plays out in particular ideas

about the industrial economy, where he really likes the idea of the United States as it was in the late 19th century to maybe sort of the first half of the 20th century as this kind of industrial powerhouse that is producing a ton of the goods that people consume. And in particular, he thinks a lot about, you know, steel, and he thinks a lot about the auto sector, where he loves the idea of the United States kind of producing most, if not all, of its own steel and autos. And so he tends to think that putting these tariff walls in place is intrinsically good for helping these domestic industries. He also falsely likes to claim that tariffs are essentially being paid

by other countries to the United States when he imposes them. And of course, that's not really the case. Tariffs are actually paid for by, in the case of the U.S., by U.S. companies importing goods from other countries and that are often sort of passed on to consumers. But yeah, it's not it's not China paying the tariff. It's companies importing the goods from China that are paying the tariff. Yeah, that's correct. That's correct. When Trump put tariffs on a bunch of Chinese goods in his first term, it didn't mean that China was giving the United States any money. It basically meant that American companies importing these Chinese

goods were paying the tariffs and then most likely passing the costs all on to American consumers. So that's sort of an argument that Trump makes. But I think perhaps more than that kind of rhetoric that he likes to sort of claim about who's paying the tariffs, I think he likes this idea of protecting domestic industries from foreign competition, which, you know, it was a very popular idea in the first half of the 20th century and throughout the 19th century, but sort of runs counter to what most modern economists would argue. Yeah, we have a much more integrated, our economies are much more integrated today. But this kind of gets back to the nostalgia around his campaign, right? The idea of make America great again, it kind of harkens back to a time like

that he's describing he wants to get back to with these tariffs. Yeah, I mean, Donald Trump is a nationalist, I think on just about every level, right, where you see with foreign policy where he's fundamentally kind of an isolationist. And I think he likes that idea of what the U.S. was before the Second World War of generally kind of stepping back a little bit from international affairs and not getting too involved in what's going on around the world. And you very much see it on economic policy that, yeah, I mean, he's sort of an old school nationalist this way where he wants to go back to this sort of idea of American greatness, which, yeah, which is this sort of U.S. industrial economy as it existed, you know, up to maybe the 1950s or something like that.

And just to be clear, I just want to establish where does the Democratic candidate Kamala Harris, where does her campaign stand on the idea of tariffs? Kamala Harris has attacked Donald Trump for wanting to put these 10 to 20 percent universal tariffs on everybody, where she's pointed out correctly that essentially it's a tax on consumption because these tariffs have been paid for by American companies and passed on to American consumers. And so at the same time, she has not shown any desire to lift the tariffs on Chinese goods, which Trump put in place and Biden maintained. And she has talked about some economic protections of her own, but not through the form of tariffs, more through the form of U.S. federal government basically just giving money or writing tax credits for specific industries. This is an interesting point, though, that the Biden administration did not take off the tariffs on China that the Trump administration imposed. Do we know why that is, Adrian? I think there's a couple of reasons behind it. I mean, number one is just pure politics, where there really is a consensus in the United States now that this attempt to sort of open the US economy to China, really since the 90s, and China joining the WTO has not worked. It has not done what the US intended, which was to

encourage China to become less protectionist itself, to have less sort of government intervention in its economy and become more, you know, more like a Western capitalist country. This has not worked. And so there's a consensus that a different approach is needed. And so these tariffs have become quite popular, or at least the idea of getting tough on China in general in the U.S. has become quite popular. So I think Joe Biden probably figured there was no political percentage in it for him to take these tariffs off of China. And then there's also a policy argument for it, you know, maybe from a more tactical point of view to say, OK, well, China has not opened up its economy the way that the U.S. wanted it to. And so you have to impose consequences for that. And this is what

the consequence is. OK, so let's actually look at now the recent history of tariffs between Canada and the U.S. In 2018, when Trump was previously in power, he imposed a 25 percent tariff on steel and 10 percent on aluminum imports, including from Canada. That was a pretty tense period of trade between us then. And part of the reason why the Trump administration said they did this was to protect and grow these U.S. industries. So, Adrian, did that happen? There is some evidence that it had the effect that it intended. It's hard to disentangle from the fact that, you know, that year there was economic growth in the United States. And so it's hard to say how much of that was the growth in some of these steel companies was due to just general economic growth versus the tariffs. But Nucor, I remember at the time, which is a smaller steel producer, added 850 jobs.

What Donald Trump did not necessarily take into account, or if he did, what he didn't care about as much, is that the number of jobs in the steel and aluminum sectors was only about 10% of the number of jobs in companies in the United States that use steel and aluminum as inputs. And so by creating this tariff wall, you know, even if you help some of these steel and aluminum companies add jobs and make more money in the United States, you know, you're disadvantaging industries representing 10 times more employment that now have to either pay more money to buy steel and aluminum domestically,

that apparently, you know, they were buy steel and aluminum domestically that apparently, you know, they were not buying it before domestically because it must have been more expensive or pay this tariff. Yeah, it's interesting. There's all these kind of knock on effects when you start tweaking something like tariffs. What did Canada do in response, because I know we did respond to the U.S.'s tariffs here. Yeah. So Canada imposed to dollar for dollar matching tariffs of 25% on a range of US goods. So in addition to tariffing US steel and aluminum, you know, the Canadians also chose some very specific products that were designed to inflict as much

political pain as possible in the US. So for instance, they put a tariff on Kentucky bourbon, because it's produced by the state Senate Majority Leader Mitch McConnell, or then Senate Majority Leader Mitch McConnell was the leader of the Republican caucus in the Senate. They put a tariff on Harley Davidson motorcycles because their headquarters are in Wisconsin, which is the home state of Paul Ryan, who was then the Republican Speaker of the House. You know, orange juice from Florida, a state that Mr. Trump has a large affinity for. It's where Mar-a-Lago, his main estate, is located. So they basically wanted to create as much economic pain as possible in places where they were going to get the attention of political leaders in the U.S.,

the hope, I think, being that you were going to see bourbon producers phoning up Mitch McConnell every day and saying, you know, hey, Mitch, when are you going to put pressure on Donald Trump to remove the tariffs on Canadian steel so that, you know, we can keep selling our bourbon to Toronto hipster bars on Queen Street West. So I think that was sort of how Canada reacted by both tariffing the products that the US was, and then choosing some strategic ones that were designed to inflict as much political pain as possible. Yeah, that's a really interesting selection when we start to look at that, because you can kind of see the strategy here and how these tariffs are being used.

If Trump were to install universal tariffs on all goods, if he is elected in November, how likely, though, Adrian, is this to trigger a bunch of retaliatory tariffs? Like we just said, you know, Canada does this in response to the U.S. So if the U.S. starts to do this to all of its trading partners, what would the response be there? Yeah, I mean, you can expect everybody to impose tariffs in that kind of situation. If for no other reason than because you have to tell somebody that if you impose tariffs, there's a consequence for that. So, yeah, so I think you would expect that Canada would reciprocate with tariffs of its own on U.S. goods. Basically, every other country would probably do the same and you would trigger a global trade war. We'll be right back after this message. I think the idea of a global trade war is pretty nerve wracking, frankly, for a lot of people,

right? That seems like a big idea. So let's just break down what that could actually mean, Adrian. If we look at Canada specifically, what might happen to the Canadian economy in a global trade war? So a bunch of different think tanks and economists have done estimates. One calculation by the Canadian Chamber of Commerce found that if there were a 10% tear up on all Canadian goods sent to the US, followed by a trade war, there would be about a $45 billion hit to Canada's economy. To average that out, they say that would be about $1,100 of lost annual income per Canadian. Of course, the effects would not be felt equally. You'd obviously have some people who would lose their jobs and would have no annual income, some people who

might be less affected than that. But that's sort of the way that they average it out. And there would be particular sectors that would be really hard hit. Oil and gas and mining metals would lose about 40% of their exports to the US in the event of a 10% tariff. And the auto sector from Canada would have a decline in US exports of about 20%. So undoubtedly, in those sectors, as well as I'm sure in many other sectors that are affiliated with them, or any sector that's exporting to the US, you would certainly have job losses. And for the people who remain, would be making significantly less money. You know, there would, I'm sure, be a retooling period, and there would be attempts to find domestic markets for goods, as well as, you know, selling more to the European Union or to other

trading partners, that sort of thing. But even with that, it takes time to reroute those supply chains. So you could be looking at years of economic pain if that were to happen. Okay. So significant impact on Canada. And like you said, the effects would not necessarily be uniform across the country. Different sectors would be affected more. But you mentioned the annual lost income of $1,100 per Canadian. So that could be pretty significant for us. That's what happens on the Canadian side. I want to ask you about the U.S. side. What about job growth, Adrian? Because this seemed to be part of the argument, right, that you would encourage domestic job growth.

Would America actually see that as a benefit? Yeah, it seems highly unlikely. I mean, you might have some specific sectors that, you know, like the steel example in 2018, you know, they're very well, yeah, never say never, there might be some specific sectors that benefit, at least in the short term, from being protected from foreign competition. But overall, if you were tariffing every good from every country being brought into the United States, you know, no, I mean, most likely you would not have job growth. And in fact, you would actually be risking a recession just because the cost would be so high, both on consumers as well as on companies that are no longer able to export their goods that you very likely would see economic contraction as a result.

So just help me understand this, though, because obviously Trump has massive support in the U.S., right? This election is kind of a toss up, almost 50-50 right now. Do some of Trump's supporters like this policy? Like you just seem to say that it wasn't really going to be good for a lot of Americans. So Trump supporters, yes, they do like this policy. And I think I think it operates on a few different levels. I mean, I think the most visceral one is that a lot of Trump supporters just like the idea of Donald Trump sticking it to other countries. You know, I think this is a big part of the reason why the tariffs on China are popular. Some Donald Trump supporters do believe the same things that he does

about the benefits of tariffs. You know, they do think that putting tariffs in place is going to bring industry back to the United States. If you put a 200% tariff on Mexican autos, it's going to cause the Mexican auto industry to collapse. And then all those jobs will come back to the US. And I'm sure some of them also believe him when he says that these other countries are somehow paying these tariffs. It's not accurate, but they don't necessarily see it as themselves paying the tariffs and their friends and neighbors paying the tariffs, or even American companies paying the tariffs. They see it as China or Mexico or Canada or the European Union paying the tariffs. Okay, so Adrian,

in terms of the overall effect of a universal tariff policy like this. It sounds like from what you're saying is that it could cause prices to rise, while at the same time actually causing economic activity to slow down in both the US and possibly in the economies of trading partners like Canada. Yeah, you would have a decrease in economic growth, potentially a recession, and certainly inflation. People would be paying higher costs. You'd have basically both inflation and economic deceleration happening at the same time. So that sounds pretty worrying, I think, for a lot of people, right? To have both of those realities happening at the same time. Can we look at what is the potential for Donald Trump to actually be able to do this on his own, like unilaterally? Wouldn't he need the support of Congress to actually get some of these things through? So surprisingly, no, on the Congress question, or probably not, because the U.S. Constitution does assign Congress the power to regulate commerce, including foreign trade. But over the years, Congress has delegated through various statutes, delegated some of that power to the executive, to the president. And Robert Lighthizer, who was Donald Trump's trade chief when he was in the White House and is still pretty close to the Trump camp,

has suggested a bunch of different authorities that he thinks Donald Trump could or should use to try to impose these tariffs. And so you can very easily imagine a scenario where Donald Trump decides that all of these countries are treating American companies unfairly across all of these, you know, tens of thousands of millions of different goods. And so all of their goods as a result will now be tariffed at whatever level he wants. And apparently he can go up to 50% under this authority. The big question I think would be where the US courts come down on this, because undoubtedly American industry would sue the federal government and try to stop them from doing this. But I think that's sort of where you'd see a lot of pushback. Okay, but when it comes to Canada, in particular, though, like, I'm wondering if we have any recourse, because we do have a free trade agreement with the states, right? We have that the USMCA, the new NAFTA. So could Trump really impose those tariffs on us if we already have that agreement? So in theory, he shouldn't be able to because we've got this trade agreement. But that may ultimately not stop him from going ahead and doing it anyway.

We know that Donald Trump and Lighthizer in particular don't really believe in dispute resolution mechanisms. And so they might go ahead, impose these tariffs. Canada, I'm certain, and Mexico, I'm certain, would immediately launch cases under the USMCA. But that's a process that can take years to unfold. And so by the time you get a resolution on that, it may be post-Trump administration anyway. But yeah, I mean, I think the one place, the one reason that the USMCA could potentially protect Canada is more in terms of Trump's psychology, because this was one of his signature, he sees it as one of his signature achievements of his time in

office. And so to ignore the USMCA or abrogate the USMCA by imposing all these tariffs, it could, for Donald Trump, be a difficult hurdle psychologically to get over, to basically have to admit to himself that this trade deal has not worked the way that he intended for it to, and that he just wants to completely disrespect his own handiwork. So it's possible that that might sort of restrain him. Yeah. Just to end here, Adrian, we've talked to you in the past about how the Canadian government

is trying to do some essentially contingency planning in the event of a second Trump term, right? So I guess from the sources that you're speaking to, how worried are they about this tariff issue? And are there plans to maybe, I guess, mitigate some of that potential damage? Yeah. So for the last just about a year now, Canada has kind of revived the Team Canada approach that it took during the Trump administration, where they've been sending, you know, cabinet ministers, provincial premiers, business leaders, members of parliament down to the US with sort of two different missions. One is to build these relationships outside of the White House with members of Congress and senators, or with state governors, or with US industry,

whom they think might have some sway over Donald Trump if he gets back into office, with the goal that these people will then put pressure on Donald Trump not to go after Canada with tariffs or with anything else. The other thing that they've tried to do is rekindle relationships with people within Donald Trump's orbit. And the argument is always sort of twofold. One is that the U.S. would be hurt by these sort of trade policies, especially vis-a-vis Canada, because we do so much business. And second of all, that Canada can be helpful to the United States in dealing with some of the actual bad actors around the world, i.e. China. So that's sort of the case that they're attempting to make, as well as these, yeah, these more sort of dollars and

cents things in the state. So they say, OK, your state has an enormous investment in Canadian fertilizer company. And so if you start putting up trade barriers, then that's going to cost X number of jobs in these communities. So it'd be really helpful if Donald Trump gets back in for you to help us make the case to him not to not impose these tariffs. Adrian, I know it's a busy time there. Thank you so much for being here today. Thanks for having me, Manika. That's it for today. I'm Manika Raman-Wilms. Our producers are Madeline White,

Michal Stein, and Ali Graham. David Crosby edits the show. Adrian Chung is our senior producer and Matt Frainer is our managing editor. Thanks so much for listening and I'll talk to you soon.