What would Trump mean for Canada?
A recent report on the potential impacts of this year’s U.S. presidential election by Scotiabank Economics is among the first to quantify the likely economic damage to Canada from a second Donald Trump presidency.
To remind, the race between Trump and presidential incumbent Joe Biden is neck and neck.
Trump vows that as president he would impose a 10 per cent tariff on all U.S. imports except those from China, on which he would apply a 60 per cent tariff.
It is likely that America’s trading partners would retaliate with equivalent tariffs of their own, as Canada and others did in response to the less extensive tariffs of Trump’s first administration.
The resulting trade war could supercharge inflation in both Canada and the U.S. Some U.S. economic analysts say it could boost inflation to as much as nine per cent if the main elements of Trump’s economic agenda are implemented.
Those elements include tradecrippling tariffs and an inflationary devaluation of the U.S. dollar to make imports less price-competitive in the U.S. market.
Trump would also try to expand the inflationary tax cuts of his first administration.
And he vows to deport the estimated 10 million illegal U.S. immigrants. That’s not feasible. But Trump’s doable plan is to incarcerate and eventually deport about two million immigrants.
That inflationary measure could disrupt supply chains in sectors where immigrant labour predominates, including agricultural exports to Canada.
According to Scotiabank’s calculations in a report released last week, Trump’s protectionism could reduce Canadian GDP by a staggering peak of 3.6 per cent in the short term, due to Canada’s reliance on U.S. trade.
Scotiabank defines “short term” as a lengthy period from 2025 to about 2028. Thereafter, it says, Canadian
GDP would continue to fall by 2.8 per cent.
Trump’s trade protectionism would likely raise Canadian inflation by 1.7 per cent above current projections, Scotiabank estimates. That would require interest rates almost two per cent higher than forecast to tame the inflation.
Canada relies on a strong U.S. economy. But the report calculates that Trump’s protectionism could reduce U.S. GDP by about 2.2 per cent by 2027 from current forecasts.
It could also raise U.S. inflation by 1.5 per cent from current projections, forcing an increase in U.S. interest rates of about two per cent.
Trump’s trade war could plunge Canada into recession, given Canada’s already weak economic growth.
In his first administration, Trump imposed tariffs on selected Canadian
sectors, notably steel and aluminum.
Trump’s second-term tariffs would cause more harm, say the Scotiabank report’s co-authors, Jean-François Perrault, Scotiabank’s chief economist, and René Lalonde, the bank’s director of modelling and forecasting.
Trump now plans a 10 per cent tariff on all $440 billion (U.S.) worth of Canada’s annual U.S. exports, which account for more than one-quarter of the Canadian economy.
Long contemptuous of free trade, Trump believes that Canada and America’s other trading partners have been “ripping us off” for decades.
Though he is a career financier, Trump is oddly fixated with U.S. manufactured exports. The manufacturing sector employs only about 8.6 per cent of the U.S. workforce. But blue-collar workers make up a large portion of Trump’s political base.
Unfortunately, Trump’s methods of championing those workers put their jobs at risk, since no one likes to buy goods and services from people who don’t buy from them.
That’s why it’s hard to identify anyone in modern times who has won a trade war. Trump’s first-term trade hostility ended with a bigger U.S. trade deficit in goods than the one he inherited.
Trump doesn’t need Congressional approval to erect tariff barriers. That would be the gain with his now more ambitious protectionism.
Canada’s best hope, Scotiabank says, is to negotiate an exemption from Trump’s planned tariffs for U.S. free-trade partners Canada and Mexico.
But a hard-fought exemption, requiring significant concessions from Canada and Mexico, would still reduce Canadian GDP by 1.4 per cent in the short term, according to Scotiabank. And it would reduce U.S. GDP by 1.7 per cent.
Scotiabank acknowledges that its data-based computer simulations can be debated. “But all (U.S.) policies proposed would be inflationary,” it says.
The high inflation rates projected by Scotiabank are lower than some worst-case scenarios in part because its report does not account for “a likely deterioration in (U.S.) federal finances” or the civil unrest Scotiabank expects no matter who wins the election.
Given the dangers of Trump’s agenda, what accounts for his popularity?
Polls show that Americans blame Biden for higher prices. And millions of Americans have not shared in the restored prosperity of the post-pandemic recovery.
If many Americans don’t realize that another bout of high inflation and interest rates is possibly in store, Canadian exporters, for their part, have for decades ignored the danger of over-reliance on the U.S. market.
Another Trump presidency might finally force Canadian enterprises to look beyond an unreliable U.S. market. But only after suffering a great deal of harm.