As we look toward a potential second term for Donald Trump, his approach to tariffs seems poised to become even more aggressive. Steve Verheul, who led Canada’s trade negotiating team during Trump’s first term, recently shared insights that highlight the complexities of trade relations between the U.S. and Canada.
Tariffs on the Table
According to Verheul, Trump is more enthusiastic than ever about using tariffs as a tool for negotiating trade. With the possibility of imposing 25% tariffs on imports from Canada and Mexico, the economic ramifications could be significant for all three countries. This scenario could usher in a “highly disruptive period,” affecting everything from consumer prices to industry stability.
Canada’s Leverage: Oil and Agriculture
However, Canada holds a strategic card in this potential trade conflict. If the U.S. attempts to impose tariffs on manufactured goods while exempting oil and agricultural products, Canada could retaliate by implementing export levies on these essential commodities. Verheul notes that Canada is the largest external supplier of oil to the U.S. and a major exporter of agricultural goods. This means that such levies could rapidly increase costs for American consumers, particularly on fuel and food.
“I agree that the first areas potentially subject to exemption would be oil and gas and food,” Verheul stated. Yet, in a trade dispute, Canada might find it beneficial to impose export taxes on these products to negotiate broader exemptions across all sectors.
Economic Consequences
While such measures could be seen as a last resort, the stakes are high. If Trump follows through with extensive tariffs, Canada could face a GDP reduction of 3% or more, prompting significant monetary and fiscal responses. Doug Porter, chief economist at the Bank of Montreal, emphasizes the need to take these threats seriously. He warns that financial markets may be underestimating the risks associated with broad tariffs, even if the immediate reaction has been relatively stable.
In a worst-case scenario, the Bank of Canada may need to reduce interest rates to as low as 1.5%, down from the current 3.75%. Additionally, Porter suggests that the government might need to offer substantial fiscal support, potentially amounting to half a percent of GDP.
Currency Fluctuations
Tariffs can also lead to currency depreciation, and Porter posits that a 5% to 10% decline in the Canadian dollar could be within reason if tariffs are enacted. This would bring the exchange rate to levels not seen since 2003, adding another layer of complexity to the economic landscape.
As we navigate these turbulent waters, it’s essential to stay informed about the potential outcomes of Trump’s tariff strategies. Canada’s ability to respond effectively could play a crucial role in mitigating the economic fallout. The coming months will undoubtedly be critical in shaping the future of North American trade relations.
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