Donald Trump is no stranger to strong ideas and his recent proposition to impose a 25 per cent tariff on goods imported from both Canada and Mexico as early as Feb. 1 is no exception.
Tariffs—a form of tax applied on imports from other countries—are commonly imposed by several countries for a variety of reasons such as protecting domestic industry or addressing unfair foreign practices.
The United States in particular is familiar with tariffs. Most notably, the imposition of the 1930 Smoot-Hawley Tariff Act which aimed to protect American farmers from foreign competition by increasing import duties approximately 20 per cent. Economists say the effects of this directly contributed to the devastation of the Great Depression and reduced global trade by roughly 65 per cent.
Naturally, the economy has completely transformed in the 95 years since. However, the core tenets remain. Research has found that throughout time, tariffs have a resoundingly negative effect on economic output that only increase with higher tariffs over time.
Though many agree some of Trump’s tariff threats are justified, the erroneous nature of them has garnered international attention. In a virtual address to the World Economic Forum on Jan. 23, Trump said it’s “not fair” the US has a $200 billion trade deficit with Canada, a number which is closer to $45 billion in reality.
To drive his gripe with Canada home, Trump—after tying his reasoning to border security issues and immigration last November—added the US doesn’t need Canada’s manufacturing of cars, lumber, oil, and gas.
At this stage, the tariffs aren’t finalized, and whether they’ll be blanket or sector-specific tariffs remains unclear with several potential scenarios and caveats to consider. According to Ontario Premier Doug Ford, among these outcomes could be the loss of roughly 500,000 jobs in Ontario alone.
The imposition and subsequent effect of these tariffs in Canada will largely depend on Ottawa’s response to Trump.
“If the president does choose to proceed with tariffs on Canada, Canada will respond and everything is on the table,” Prime Minister Justin Trudeau said on Jan 21.
For students especially, understanding the potential implications of Trump’s threat is fundamental as the cost burden of tariffs often falls on consumers.
Trudeau stated “dollar-for-dollar matching” is an option he’d be willing to pursue against Trump’s tariffs. “Dollar-for-dollar matching” or retaliatory tariffs refers to a tax that a government charges on imports to retaliate against a country for charging tax on its own exports.
Trudeau’s retaliation proposition, coupled with Trump’s tariffs, could make paying for your favourite beer with a single bill—or at all—a distant memory. Given Canada is the number one destination of US alcohol, the repercussions of a tit-for-tat approach to these tariffs would be large within the alcohol trade.
“I’ve sent a direction to the LCBO that if these tariffs come to clear off every bit of US alcohol off the shelves,” Ford said during a Jan. 20 press conference.
The effect of these tariffs on alcohol is especially relevant to students, whose age range is within the demographic with the most alcohol consumption in Canada. Even for the US goods that’ll remain available in Canada, experts say the prices will reflect Trump’s sweeping tariffs.
Under retaliatory tariffs, Canadian businesses will be required to pay duties on imports from the US and the outcome will be twofold: the government will generate revenue, and the burden of cost will fall onto the consumers.
According to RBC economists, producers may not have sufficient profit margins to absorb higher costs and will have to these costs on to consumers. If the consumer isn’t willing or able to take on this added cost, demand will plummet. While the opposite could be true, other reports have minimal hope.
Experts both within and beyond Canada have highlighted the severity of these tariffs on the Canadian economy.
“The possibility of tariffs is the biggest threat to the Canadian economy, as more than 70 per cent of our exports of goods and services are destined for the US,” wrote Florence Jean-Jacobs, principal economist in a recent Desjardins report.
Between the US and Canada alone, Trump’s promise to wield aggressive tariffs puts over $900 billion on the line. Though Trump claims the US economy will thrive without Canada, only time will reveal the ramifications should Trump choose to follow through with his tariff imposition.
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