Canadian Shot Across The Bow In Its Trade War With The U.S.

Following the breakdown in bilateral negotiations last week, the US immediately imposed 50% tariffs on an additional US$ 20 billion imports from Canada. This trade war that has now escalated as Canada just announced retaliatory tariffs on US imports of an equal dollar amount. Canada has served notice that has adopted a policy of matching the US, “ dollar for dollar”, in this tariff war. It is not a blanket tariff on all trade, but it does create costs to Canada's industrial base and consumers. Politically, polling result reveal that over 75% of Canadians overwhelmingly approved of the government’s actions, knowing full well that Canadians will endure a disproportionate burden in conducting this war.

To put this in perspective, the US and Canada roughly sell the same total dollar amount of goods to each other as total two-way trade amounts to close to US$ 900 billion. The US economy is nearly twelve times that of Canada, so the imposition of dollar for dollar tariffs falls much more heavily on Canadians. Numerically, Canada’s targeted goods will account for roughly 5.5% of all physical goods imported from the US. When these new Canadian tariffs are combined with existing tariffs, as much as C$ 70 billion or 17% of all US imports will be subject to some form of tariffs.

Over 80% of bilateral trade crosses the border duty-free under the Canada–United States–Mexico Agreement (CUSMA). The main risk to the Canadian economy does not lie in the retaliatory tariffs per se, rather in the impact of imposing tariffs from 15% to 50% on key industrial sectors. The list of new tariffed goods includes agricultural equipment, electronics, pulp and paper and additional tariffs on steel. It is too early to assess the impact of these tariffs on inflation. Canadian substituted products and imports from overseas will affect the final prices domestically. At best, economists are expecting that GDP growth will be negatively affected by 0.5% to 1.5% should these tariffs be in place over the next few years. Offsetting this impact is the government’s decision to re-direct some tariff revenues to those sectors hardest hit. 

What will be the next shoe to drop ?