As the Trump White House follows through with 25-per-cent tariffs against Canada (and 10 per cent against Canadian energy), the most immediate result is that U.S. consumers will be paying billions of dollars in new federal taxes.
Although the coming trade war will almost certainly be more painful for Canada, every available economic projection shows that the effect on the U.S. will be higher prices, job losses and a noticeable hit to GDP.
A tariff is nothing more than a tax on imports, and U.S. imports from Canada stood at C$592.7 billion in 2023. Energy accounts for $165 billion of that total.
With the Trump tariffs being set at 10 per cent for energy, and 25 per cent for everything else from Canada, that works out to about US$83.4 billion in new annual taxes if consumption habits stay the same.
That’s slightly higher than the total amount in excise taxes (US$76 billion) that the U.S. federal government collected in 2023.
Washington collects excise taxes on every bottle of liquor, airline ticket, pack of cigarettes and gallon of gasoline sold in the United States. The tariffs on Canada alone are equivalent to an immediate doubling of those taxes.
And the tax burden rises even higher when accounting for equivalent 25-per-cent tariffs on U.S. imports from Mexico.
According to the Washington, D.C.-based Tax Foundation, the Canada/Mexico tariffs can be expected to drop U.S. GDP by 0.3 per cent, result in the loss of 286,000 jobs, and raise per-household costs by about US$670.
https://x.com/TaxFoundation/status/1885422896585019510
A November analysis by Scotiabank determined that Canada would be hit far harder in any trade war with the United States, but at noticeable expense to U.S. consumers.
“Under 25% tariffs … the loss of U.S. GDP could increase to up to 0.9%, and up to 5.6% in Canada with full retaliation or 3.8% without,” they wrote.
And the damage isn’t just because American consumers would be paying tens of billions in new taxes. U.S. consumption of Canadian goods would naturally go down and shift toward more expensive sources of supply, resulting in permanently higher prices.
Canadian exports to the U.S. are disproportionately comprised of such basic commodities as lumber, aluminum, cereal grains and crude oil. These are easily replaceable, but the only reason they became such a large share of U.S. imports is because they’re cheaper than the alternatives.
Dozens of countries are willing to export aluminum to the United States, but the Americans buy $18 billion worth of the metal each year from its northern neighbour because Canada is generally able to produce it the cheapest. Aluminum is an energy-intensive metal to produce, so Canada is able to exploit its abundant supplies of hydroelectricity to crank it out at a competitive price.
If Canadian aluminum is suddenly made uncompetitive through tariffs, U.S. manufacturers can find the metal elsewhere — but they’re going to be paying more.
The impacts won’t be shared equally by American consumers. Rather, they’re going to be felt hardest in counties sharing a border with Canada — counties that all mostly went for Trump in the 2024 U.S. presidential election.
Susan Collins, the Republican senator from Maine, detailed the interconnectivity between her state and Canada in a lengthy social media post denouncing the Trump tariffs. Collins wrote that “95 per cent of the heating oil used by most Mainers to heat their homes comes from refineries in Canada.
“The Air National Guard Base in Bangor depends completely on jet fuel and diesel from Canada,” she added.
https://x.com/SenatorCollins/status/1885467361945280994
And the situation gets much more expensive when it comes to the Canadian imports that are harder to replace, such as aircraft, auto parts or even nuclear equipment.
A writeup by the New York-based Council on Foreign Relations estimated that U.S. auto prices could be expected to rise by as much as US$3,000 per vehicle due to automakers being forced to pay the full tariff rate on Canadian and Mexican parts with no immediate substitute.
“The automobile industry is one of the most highly integrated in North America, with parts sometimes crossing a border half a dozen times before final assembly of a vehicle,” wrote TD Economics in a Jan. 28 report.
Crude oil would similarly be an example of an import with no immediate alternative, which is probably why Trump tariffed it at a lower rate (10 per cent). Multiple U.S. refineries are configured to only refine the heavier oil that comes out of Alberta.
They did so because Alberta oil, sold to the U.S. at a discount, is some of the cheapest on earth. But if Canadian oil were suddenly hit with a 25-per-cent premium, these refineries couldn’t immediately switch to processing domestic oil.
With large swaths of the U.S. Midwest almost entirely dependent on gasoline from refineries configured for Canadian crude, the lower tariff rate helps curb what would otherwise be an unavoidable spike to gasoline prices.
“At 10%, there is likely a gamble that U.S. refiners could absorb some (or all) the impact via profit margins,” read a Feb. 1 analysis by TD Bank economists Beata Caranci and James Orlando.
National Post