Canada will bear a greater economic burden than the United States if Donald Trump wins the upcoming presidential election and imposes promised tax and tariff cuts on all American imports, a new report warns.
The analysis published Tuesday by Scotiabank Economics says that if Trump returns to the White House and follows through on his promise to impose a 10 percent tariff on all imported goods – with the exception of China, which would face an exclusion of 60 percent of its American exports – and if the countries If they retaliated with their own, there would be “substantial negative impacts” on the US economy. GDP would likely fall by more than two percent by 2027 relative to current forecasts, while inflation would rise by 1.5 percent, leading to a two percent rise in interest rates.
In Canada, the economic impact would be even more severe with an expected GDP drop of 3.6 percent, given its dependence on trade with the United States. Inflation and interest rates would also rise over the next two years: 1.7 percent and 190 basis points. points, respectively, the report suggests.
“What Trump is seeking to do is much broader and much more worrying than the tariffs he imposed during his first term,” said Scotiabank chief economist Jean-François Perrault, author of the report.
The report also serves as another reminder that Canada urgently needs to address its lagging productivity issues, warning that the problem makes Canada more vulnerable to economic shocks caused by trade policy changes in the United States and abroad.
Perrault says it’s too late to fix the problem in time for the US elections in November.
“It takes a long time to change the direction of productivity,” he said in an interview. “Maybe some ground can be regained in the coming quarters, but we need big strides to get to where we need to be (to withstand U.S. economic shocks).”
Trump’s policies are more likely than Biden’s
Although the analysis examined the impact of policies proposed by both Trump and US President Joe Biden, it focuses more on the consequences of Trump’s promises.
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That’s because they are not only potentially more damaging, Perrault said, but also because they are more likely to be implemented than Biden’s promise to raise the corporate tax rate.
“There’s really no appetite in the United States right now for any kind of tax increase,” Perrault said.
Implementing a change to the corporate tax rate would require Biden’s Democratic Party to control both houses of Congress, a scenario that is considered highly unlikely, given recent survey. Meanwhile, Trump’s proposals, particularly his expanded tariffs, are seen as more likely to be implemented quickly and without congressional approval.
During his presidency, Trump imposed tariffs on about $50 billion worth of Chinese goods imported into the United States, then expanded them to another $300 billion, sparking a trade war with China. Many of those tariffs have remained in place under the Biden administration.
Trump also imposed tariffs of up to 25 percent on imported washing machines, solar panels, steel and aluminum in 2018. Canada and Mexico were subsequently exempted from steel and aluminum tariffs in 2019, although the Canadian aluminum tariff was reintroduced briefly in 2020.
US government data shows that those tariffs (none of which were legislated or passed by Congress) have cost US manufacturers more than $230 billion through March 2024 and have shrunk the US economy by 0.3 percent.
Trump has repeatedly claimed that tariffs serve to punish unfair trade practices by other countries, despite agreement among economists that they raise prices for American consumers, and says he wants to expand them to 10 percent on all goods imported from each country does win in November. . He has also said that he will seek a 100 percent tariff on imported cars and set a 60 percent tariff specifically for Chinese imports.
The most likely scenario – a continuation of Trump’s 2017 tax cuts beyond their expiration in 2025, combined with across-the-board tariffs – would see Canada’s GDP remain three per cent lower over the long term, and just over one percent lower in the United States.
The Scotiabank report says the economic damage from tariffs can be reduced on both sides of the Canada-U.S. border if Canada and Mexico negotiate a waiver with the United States under the Canada-United States-Mexico Agreement (CUSMA), which replaced the North American Agreement. Free Trade Agreement (NAFTA) during the Trump administration.
Scotiabank predicts that in that scenario, Canada’s GDP would only fall 1.4 percent in the short term (half the expected drop without a waiver) and 0.3 percent in the long term, while GDP in the United States would fall 1.7 percent and 1.2 percent. respectively.
Perrault says he is “hopeful” that such an exception can be negotiated, although Trump would likely insist on more concessions that benefit American trade. However, that “bigger stick” approach could be somewhat limited compared to the contentious CUSMA negotiations.
“Trump owns CUSMA, so he wouldn’t be in a position to throw it away,” he said. “So maybe we’ll have a little break.”
The report also examines the impact of Trump’s repeated promise to mass deport approximately 10 million undocumented immigrants living in the United States illegally, something Perrault admits would be “politically and logistically unfeasible.” It would also be economically damaging, according to the analysis, as it would permanently reduce both U.S. employment and GDP by three percent, although the impact on Canada would be negligible.
The analysis says Canada and the United States could see additional economic impacts due to a number of scenarios they did not explore, including China retaliating for the tariffs by dumping its US Treasury holdings; new debt ceilings and budget crises in the United States; Trump’s appeasement of aggressive foreign adversaries like Russia and China; and internal civil disorder regardless of who wins the US elections.
Perrault said the findings also underscore the key difference between Trump and Biden as Canadian trading partners.
“Biden seems to view the negotiations from a collaborative approach: How can everyone emerge victorious?” he said. “Trump doesn’t see it that way. His mindset is, ‘How will this benefit me?’”
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