The headline on the Wall Street Journal’s editorial on U.S. President Donald Trump’s 25 per cent tariffs on Canada and Mexico was: The Dumbest Trade War in History.
It points out that Trump’s supposed justification (illegal drugs flowing across the border) for the “economic assault” on Canada and Mexico “makes no sense”; that American industry would be much less competitive without North American trade; that American consumers will suffer; and that countries will be less eager to deal with the United States, given its willingness to ignore its treaty obligations.
This is all true. If I have any quibble with the Journal’s editorial, it’s that instead of calling Trump’s trade war the dumbest in history, I would have called it the most idiotic.
To quantify the self-inflicted harm of the dumbest and most idiotic trade war in history, the Tax Foundation estimates that the 25 per cent tariffs imposed on Canada and Mexico, plus the smaller tariff on China, will shrink U.S. gross domestic product by 0.4 per cent, shrink its capital stock by 0.3 per cent, reduce full-time equivalent employment by 330,000; and amount to a tax increase of over $1 trillion on Americans over the next decade.
And that is only the direct effect of the tariffs. The U.S. economy will also experience considerable harm from retaliatory tariffs and the increased reluctance to deal with the U.S. as a result of its unprovoked economic attacks on its allies.
Because Canada-U.S. trade accounts for a much larger share of the Canadian economy, Trump’s $1-trillion tax hike on Americans will have a larger effect on Canadian GDP, reducing it by about 2.6 per cent per year, according to University of Calgary economist Trevor Tombe. Other estimates, such as from RBC, suggest the damage could be even higher.
How then should Canada react? One strategy might be to try to negotiate with, or appease, Trump, in an effort to get him to drop the tariffs. But negotiation generally requires that the side you are dealing with uses logic and reason, which Trump does not.
Another strategy, supported by Canadian politicians of all stripes and at all levels of government, is to enact countervailing tariffs on American goods. Such tariffs, as well as softer “buy Canadian” policies, have already been announced and will be implemented with the intention of negatively impacting the American economy to create political pressure to end the trade war. But there are problems with this strategy, too.
If the Trump administration is determined to harm both the American and Canadian economies with protectionist taxes, additional protectionist taxes from Canadian federal and provincial governments will not improve the situation. Punishing Canadians engaging in North American trade will only serve to cause more harm, without any guarantee of getting the U.S. to reduce its tariffs.
This doesn’t mean Canada should do nothing. While Trump’s tariffs are estimated to cut 2.6 per cent of Canadian GDP, Canada has its own internal trade barriers that cut economic output by an estimated 3.8 per cent. In other words, Canada could more than reverse all the damage Trump’s protectionism will have on the economy by getting rid of its own internal protectionism. This is something we should do right away.
And interprovincial trade barriers are only part of Canada’s internal trade barriers. There are plenty of barriers that prevent trade even within the same province.
Minimum wage laws, rent controls, labour regulations, occupational licensing, overbearing environmental regulations — there’s a long list of government policies that prohibit people from engaging in voluntary and mutually beneficial trade, even within the same province. The situation is made worse by oppressive tax rates that discourage economic participation and productivity.
What, then, should Canada do in response to Trump’s tariffs? The best way to build a more resilient and dynamic economy is to tear down our own interprovincial trade barriers, reduce government spending to allow for a less oppressive tax regime and speedily get rid of regulations that prohibit or impede voluntary economic exchange. These are, by the way, all things Canada should do, regardless of what Donald Trump does.
National Post
Matthew Lau is a Toronto writer.