President-elect Trump doubled down on his threat to impose tariffs on imports to the U.S. This time he focused on two countries — Mexico and Canada — with a statement that he would put a 25 percent tariff on imports.
How should Canada counter these threats?
This week Trump posted:
“On January 20th, as one of my many Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% tariff on ALL products coming into the United States, and its ridiculous Open Borders. This tariff will remain in effect such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”
“Until such time as they stop, we will be charging China an additional 10% tariff … on all of their many products.”
Source: @realdonaldtrump Meta/Instagram
Late Wednesday the Prime Minister of Canada talked with all the Premiers, and they will consider tough border controls and increased spending on defense towards the 2 percent of GDP target.
The President of Mexico, Claudia Sheinbaum, sent a letter saying that “dealing with migration and drug consumption in the U.S. cannot be addressed through threats or tariffs…For every tariff there will be a response in kind, until we put at risk our shared enterprises.” She also pointed out that the precursors needed to make synthetic drugs like Fentanyl come from Asia, not Mexico.
But Canada does not have the same problems as Mexico has with illegal immigration and synthetic drugs. The main problem for Canada is that it is very dependent on international trade and especially with one customer, the U.S.
Alberta exports about 4 million barrels per day of oil to the U.S. B.C. sends more than 50 percent of its exports the U.S., for example softwood lumber, other commodities and electricity. Ontario is enmeshed with the U.S. in automobile and auto parts manufacturing. Newfoundland exports 60 percent of its seafood to the U.S.
A 25 percent across-the-board tariff would be devastating for Canada. In October the Chamber of Commerce published a report that studied the impact of a 10 percent tariff and concluded that it would mean a loss of $1,100 in real income for each Canadian. Trevor Tombe, the report’s author, said a 25 percent tariff would mean a 2.6% drop in real GDP and a recession.
Energy products make up 1/3 of Canada’s exports. Canada’s exports to the U.S. are about 77 percent of total exports. Canada’s trade-to-GDP ratio has been between 60 and 70 percent for the last decade.
Since the U.S. is the largest producer of crude at 13.1 million barrels per day, Canada’s exports of 4.1 million barrels are no longer as critical. The U.S. exports about 3.7 million barrels so they could survive a cutoff of Canadian oil. A similar situation exists with Ontario’s automobile manufacturing sector.
As Mexico’s President said, “No one wins a trade war”. Canada needs to recognize its precarious position. It would be better to negotiate than to retaliate, unless there’s no alternative.
Hilliard MacBeth
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