Auto tariffs from U.S. expected to have ‘very severe impact’ on Ontarians
Canadian economy would be left with ‘permanent scarring,’ TD analysis warns
U.S. tariffs on auto imports would permanently reduce Canada’s long-term economic capacity, a new TD Economics report says, but the most significant harm would be concentrated in Ontario, where one-in-five jobs in the manufacturing sector would be at risk. A new analysis of the Trump administration’s proposed tariffs on vehicle and auto part imports by TD senior economist Brian DePratto found that the impact on the Canadian economy would be significant and create “permanent ‘scarring’ that reduces Canada’s long-run economic capacity.” According to the report, released Monday, tariffs would affect investor confidence, which DePratto said creates “a significantly worse outcome.” GDP growth would stagnate and be effectively flat for half a year, reducing growth by half a percentage point in 2019, with the peak impact on GDP growth at -1.30 per cent. The Canadian dollar would depreciate by eight to 15 per cent, “with significant volatility coming alongside.” “What’s more, significant divestment also occurs, meaning that part of this lost output is never recovered,” DePratto wrote. “This ‘scarring ’ (or negative supply shock) leaves the level of output permanently 0.2 percentage points below the ‘business as usual’ or baseline scenario.”
The economic impact in Ontario specifically would be worse than in Canada overall, with most of the 160,000 jobs lost as a result of the tariffs concentrated in the province. DePratto said the potential losses would amount to one in five manufacturing jobs in Ontario, a repeat of the number of positions lost between 2008 to 2010. GDP growth in Ontario could be reduced as much as two percentage points. DePratto likened the potential scenario to the 2015 oil crash, which affected the overall Canadian economy but hit Alberta particularly hard.
“It’s almost a tale of two economies,” DePratto said in an interview. “For Canada, it’s definitely not good. Stagnation for half a year is not a great outcome. But for Ontario, it’s much, much worse, given that we’re talking about a sector that is very highly concentrated in the province ... This will be a very severe impact for the Ontario economy.”
The TD analysis is based on an assumption that the tariffs imposed by the Trump administration would be 10 per cent on vehicle parts and 25 per cent on finished automobiles, and would come into effect in 2019.
Last month, U.S. President Donald Trump initiated a Department of Commerce investigation to determine the national security effects of the import of automobiles and auto parts under Section 232, a move that industry experts have said would devastate the North American auto industry. Economists say the reach of the tariffs would not be limited to the countries that export vehicles and auto parts to the United States. Many have said that the immediate impact would be felt by American consumers, as the cost of vehicles would increase. A Peterson Institute for International Economics report estimates that 195,000 U.S. workers would lose their jobs if the tariffs are imposed. That figure would jump to 624,000 jobs if other countries retaliate with their own tariffs. A Scotiabank report released last week analyzing how tariffs could play out in North America said the auto tariffs would have a more substantial impact on the Canadian, U.S. and Mexican economies than existing steel and aluminum tariffs and could potentially spark a wider trade war — one that would tip all three nations into recessions. “Compared with steel and aluminum, auto manufacturing accounts for a larger share of valueadded in each NAFTA country and drives more jobs in related and downstream industries,” the report said.
“The move against cars could tip the U.S. into a global trade war as its partners retaliate by imposing heavy duties on a wide range of U.S. goods.”
Canada’s Innovation Minister Navdeep Bains told Reuters that the government is considering all options in response to the tariffs, including providing financial aid to the auto industry. DePratto’s report does not include potential government support programs, but he said that such a move would not be able to mitigate the effects of the tariffs.
“The confidence effects alone and the immediate adjustment process means it’s very challenging to envision this occurring and having a perfect mitigating offset,” DePratto said.
For Canada, it’s definitely not good. Stagnation for half a year is not a great outcome. But for Ontario, it’s much, much worse.