Doug Ford has called an early election in Ontario because he says he needs a new mandate to deal with Donald Trump’s tariffs, a response that will likely require hundreds of billions of dollars in unplanned spending.
A news report Tuesday quoting federal sources suggest that Ottawa is thinking along similar lines, with preparations for a multibillion-dollar pandemic style bailout for workers and businesses.
The Trudeau government is said to be readying emergency measures to help Canadians pay for rent and groceries — measures that would require parliamentary approval, perhaps conveniently keeping the Liberals in power for more days and weeks.
To Ford’s credit, he is at least making reference about the need to do things differently: cutting red tape and streamlining approvals “to get big things built faster.”
But the federal approach seems to be as one-dimensional as its modus operandi to most of the big challenges over the past nine years: “let’s write a big cheque.”
That knee-jerk reaction has left the country ill-prepared for Trump’s tariffs.
As the C.D. Howe Institute notes in a new report released Tuesday, Canada’s debt levels are too high to deal with the next economic crisis.
Combined federal and provincial net debt settled at about 75 per cent of GDP post pandemic.
“If President Trump fulfills his tariff threats, Canada’s debt problems will get worse instead of better,” said the report’s co-author, Alexandre Laurin, director of research at C.D. Howe. “This will heighten the concerns about the sustainability of Canada’s federal and provincial debt, limiting the strength of the fiscal response to a tariff-induced recession.”
The report recommends public debt should be reduced by 10 percentage points by the end of the decade through multi-year expenditure ceilings.
What is becoming clearer by the day is that this government’s instinctive reactions have helped to get us into this mess — and are unlikely to get us out of it.
Justin Trudeau has already said he favours dollar-for-dollar retaliation, and there is no doubt that the urge to ram Trump’s tariffs down his throat is strong.
The inconvenient truth is that we are more vulnerable to trade disruptions
But common sense suggests the desired outcome — to get the president to change his behaviour — is unlikely to be achieved through retaliation.
During the U.S.-China trade war of 2018–19, prices increased for American consumers and real incomes fell as Trump put tariffs on washing machines, solar panels, steel and aluminium. Crucially though, Americans didn’t blame Trump.
The U.S. fabulist-in-chief will undoubtedly strive to achieve a similar outcome, blaming Canada for any increase in the price of gas or housing that results from his tariffs and subsequent retaliation.
Export controls look inevitable and Canada has to use its leverage in the things Trump wants — especially critical minerals.
But economists who have looked at the history of trade wars warn retaliation alone is a bad idea, especially when the two economies are so imbalanced.
The U.S. economy relies on domestic consumption and is big enough to sustain a trade war. Canada, by comparison, has an export-driven economy, with 80 per cent of sales going south to the U.S.
Joseph Steinberg, an associate professor of economics at the University of Toronto, noted on social media that by his calculation 25-per-cent tariffs, followed by dollar-for-dollar retaliation, would hurt the Canadian economy five times more than it would hit the Americans. The inconvenient truth is that we are more vulnerable to trade disruptions.
Trevor Tombe, an economics professor at the University of Calgary, calculated that level of tariffs would shrink the Canadian economy by two to three per cent.
Writing in The Hub, he said that bilateral trade balances are a poor indicator of economic health or fairness. But try telling that to Trump.
The longer-term solution is for Canada to shrink its trade imbalances by strengthening its economy, and, consequently, the Canadian dollar. That would make imports less expensive, exports more costly for international buyers and help reduce the trade surplus.
Tombe pointed out that Canada’s trade surplus with the U.S. is more than offset by the roughly $400 billion in annual financial outflows southward, a reflection that the Canadian economy is not an attractive investment environment.
This is the point that Business Council of Canada senior vice president, Robert Asselin, was making in an interview with the National Post last week: that we need to discard our complacency and make the structural reforms necessary to improving our investment climate by reducing debt; easing regulatory burdens; knocking down barriers to interprovincial trade and domestic competition; reforming business taxation; coming up with a bold science and technology strategy; and, above all, making economic growth our north star.
It’s Economics 101: higher productivity leads to better living standards, higher wages, lower prices and currency appreciation.
But Canadian governments at all levels have been fighting the wrong wars, more focused on wealth redistribution than on wealth generation.
Trump’s arrival as an uninvited guest, like Banquo at the banquet, means the next government has a golden opportunity to make the dramatic changes that might not have been possible before the president inaugurated the age of economic madness.
National Post
Get more deep-dive National Post political coverage and analysis in your inbox with the Political Hack newsletter, where Ottawa bureau chief Stuart Thomson and political analyst Tasha Kheiriddin get at what’s really going on behind the scenes on Parliament Hill every Wednesday and Friday, exclusively for subscribers. Sign up here.