'Economic blow': Experts warns of US election's potential impact on Canadian economy

University of Calgary economics professor, Trevor Tombe, discusses the upcoming US election and its potential impact on the Canadian economy.

This interview has been edited for clarity and length.

 

Michael Higgins: Your report raises a red flag about protectionist policies, but is it just Donald Trump who Canadians should be paying attention to?

Trevor Tombe: You're right that both parties have taken a more protectionist stance on a number of policy files and have under successive administrations. Softwood lumber that would have been escalated under President Biden, that's a fight we've been having for quite some time. Or issues around procurement, or the ability of Canadian companies to be involved in some of the new initiatives south of the border through the Inflation Reduction Act, and subsidies for certain climate-related investments in the United States. That's all run of the mill, normal trade tensions between two large economies.

What's new in this campaign south of the border is the proposal from former President Trump to levy an across the board tariff of 10 per cent on everything, and potentially as high as 20 per cent. Depending on when you catch him, he'll cite a higher number than 10. That's something that we haven't seen any credible presidential candidate put forward, and not a policy measure that we've seen the US adopt in a very long time.

MH: The former US ambassador to Canada, Bruce Heyman, told an audience in Calgary recently that a new president imposing tariffs would be one of the most detrimental potential proposals for the Canada-US relationship.

What kind of damage could that do to the Canadian economy?

TT: It's really hard to overstate how significant economic damage from such a measure would be, not just on Canada, but also the United States.

The US and Canada trade is not just where we produce one thing, they produce another, and then we exchange the classic, historical way of thinking about trade. Our two economies are deeply interconnected through supply chains that cross the border back and forth, where parts are made in one part of the country, shipped to another, assembled into some other input that is then shipped back across the border.

Just to illustrate, about 12 cents of every dollar exported from Canada to the United States is actually value that originated in the US, like an input into something else that's shipped back. We have close to $2 trillion in direct investment flowing both ways in terms of this relationship, so if we levy a 10 per cent tariff, that really changes all of the business and investment calculations behind those big supply chains.

And what we do in this report for the Canadian Chamber of Commerce, released just a few days ago, is try and quantify how much of an impact this would have. What we find is that it would shrink Canada's economy by potentially as much as 1.6 per cent, which might not sound like a lot, but that's about $1,100 per person, or about $45 billion in total and just lost economic activity because of lower productivity as a result of this tariff.

The costs in the US are almost as large and so it really would be a big economic blow.

MH: So if you look at it from both sides of the border, where does this register on the radar of Americans? How aware are they of the importance of trade between our two nations?

TT: The US is, of course, a large country with diverse states with economic relationships that vary. Canada is an incredibly important trading partner for the northern states in particular, but 34 of the US states have Canada as their top export destination.

Michigan, for example, trade between it and Canada is equivalent to about 14 per cent of its entire economy, which is more than what British Columbia has in terms of its trade between it and the United States as a share of its economies.

But if you look among some of the southern states, it's much smaller. Nevada, for example, just a little over 1 per cent of its economy is tied to trade with Canada, so there are differences.

But I'd note, interestingly, that many of the kind of Midwestern swing states that are critically important in this year's electoral campaign are disproportionately tied to Canada in terms of their own economic well-being. So an across-the-board tariff would disproportionately harm those states, and Michigan in particular.

MH: Where should this register on the radar of Albertans? The premier certainly had it in her sights as far back as February when she traveled to Washington for meetings with lawmakers on Capitol Hill.

TT: This is very important for manufacturing in Ontario, that shouldn't come as a surprise to anyone, but it's also important for Alberta because the largest export from Canada to the United States is actually energy and the overwhelming majority of that is oil and gas, largely from Alberta.

So a 10 per cent tariff on goods across-the-board, well, that would mean a few things. In part, some of that would be borne by US consumers. Tariffs are largely attacks on those who are doing the importing. So this would mean higher cost to refineries and higher gasoline prices in the Midwest of the US in particular.

But some of the tariff might also be shifted up to producers in Alberta. Taking a haircut, accepting a lower price, if you will, for oil shipped to the US that would lower revenue, lower investment, potentially have employment implications in the sector.

Interestingly for the Government of Alberta, it would also mean lower royalty revenues. If the Alberta price received by producers here falls as a result of the tariff, then so do royalty revenues. So it could potentially be a multi-billion dollar hit to the Government of Alberta.