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Don’t mess with the Donald

Report by Toronto think-tank cautions Prime Minister Trudeau against retaliating on Trump’s “border tax” threat

don’t mess with the donald

It’s all well and good that Prime Minister Justin Trudeau strategically reshuffled his cabinet earlier this month in anticipation of President Trump moving into the White House, but a new report says that any kind of retaliatory measures against Trump administration, especially when it comes to trade issues, might seriously backfire.

The C.D. Howe Institute’s latest report on trade relations between the U.S. and Canada argues that if Trump were to follow through on his plan to impose a tariff on all U.S. imports, there would be significant damage to the Canadian economy. But worse still would be the economic consequences of pushing back against this tariff by imposing our own tax on American goods imported by Canada.

Trump’s protectionist agenda has been one of the hallmarks of his electoral victory. It was in fact, underscored in last week’s inauguration address, where he told Americans that his administration would follow “two simple rules — buy American, hire American.” One of the ways in which Trump intends to incentivize Americans to consume American-made products is to make foreign goods more expensive on American store shelves.

“Canada would take a significant hit under this scenario, with the heaviest blow being to the automotive sector, which is heavily focused on exports to the United States,” wrote Dan Ciurak, one of the authors of the report.

The study uses a tariff of 10 percent in its methodology, a number that was floated by the Trump administration back in December. It found that if Trump did indeed impose that 10 percent tariff on all U.S. imports, Canada’s exports of goods and services would fall by $35.7 billion. This is simply because, according to the laws of supply and demand, very few Americans would want to buy more expensive Canadian products. Canadian gross domestic product (GDP — a measure of economic growth) was predicted to shrink by almost one percent.

But what if we retaliated, imposing our own tax on goods exported by American companies to us? Apparently that won’t work out so well — the study predicts that under a retaliation scenario our economy would shrink by two percent, and have not much effect on the American economy.

The reason for that is slightly complicated, but it goes like this: imposing a tax on American products coming into Canada, will result in an overall decline in the number of goods Canadian sellers are willing to import. Through a series of convoluted macroeconomic movements, that will result in the Canadian dollar getting stronger. While that sounds like a good thing, it actually isn’t in the long run — a strong loonie means that our exports become even more expensive and unappealing to Americans. The study forecasts that retaliation to a tariff will cost our exports to shrink by $50.2 billion.

Prime Minister Trudeau seems to have stuck to script since Trump’s inauguration. Just this past Tuesday, Trump adviser Stephen Schwarzman of private equity giant Blackstone Group sat down with Trudeau to discuss trade relations, reiterating that for the most part, it’s Mexico and not Canada that is a target of Trump’s protectionist policies.

So realistically, the kind of scenario that sees Trudeau upping the ante against Trump seems pretty slim at this point, not to mention the fact that a nation of 35 million people does not have a whole lot of leverage against the world’s biggest economy.

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Cover: Illustration by Ralph Damman/VICE Canada

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