If tomorrow indeed brings the onset of US President Donald
Trump’s tariffs on Canadian exports, there will be an impact on Canada’s, Ontario
‘s as well as northern Ontario’s economy.
Ontario’s trade
and investment profile shows that it exports hundreds of billions of
dollars accounting for 36 percent of Canadian exports and of those the lion’s
share – 85 percent go to the United States. The largest exports are motor
vehicles and gold with the two in 2021 representing 20 percent of Ontario’s
exports. Indeed, resource-based goods as
a share of Ontario exports have grown over the last twenty years and account
for about ten percent of Ontario’s exports.
Lumber, pulp paper and allied products are of course well-known
traditional regional exports and the remains of the industry that weathered the
forest sector crisis continues to export much of its output to the United
States. Approximately two-thirds
of Canada’s lumber is exported and of that, over 80 percent goes to the
United states. Gold, along with nickel, palladium
and nickel are mined in northern Ontario with major markets in the United States
also. The United States imports about half
of Canada’s nickel production and Ontario accounts for nearly 40 percent of
Canada’s nickel production. And aside
from the large resource producers, an array of northern Ontario business in
general also export to the United States.
At least one somewhat
dated survey of northern Ontario businesses found that half of business sales
were outside northern Ontario. Of those
sales, half in turn were to the rest of Ontario while about 12 percent of sales
(or just over 20 percent of exports outside the region) were to the United States.
It stands to reason that a broad-based tariff on those
exports will have an impact on resource production and activity in the
region. For Canada as a whole, there are
any number of alarming estimates. For example,
the Canadian Chamber of Commerce has estimated that a 25 percent tariff across
the board on all US imports could “push
Canada’s economy into recession” by shrinking GDP 2.6 percent. Scotiabank
has estimated that:
“U.S. GDP could decline by roughly 0.2% for each 5%
increase in tariffs, while Canada could see sharper declines of up to 1.1% with
full retaliation or 0.8% with no retaliation. These losses of economic activity
are higher the higher the tariffs are. Under 25% tariffs, albeit we don’t think
this a plausible scenario, 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.” (Perrault
et al., Rules of Thumb for Estimating the Impact of U.S. Tariffs on Canada, Scotiabank Nov 28, 2024).
However, the extent
of employment and income impacts from a fall in our exports depends on the size
of the tariffs, the sectors affected, the effects on the value of the Canadian
dollar (a depreciation would counter the tariffs effect on exports but also
make our imports from the US more expensive) and most importantly, just how
vital those exports are to the United States in terms of their elasticity of demand. If the tariffs are across the board, then all
US imports will rise in price given that cheaper substitutes will not be
immediately available. If the goal is to
favour domestic US producers, it will take time to ramp up their production
capacity and in the case of resource products, if they are importing half of
their oil from Canada and large proportions of their other mineral and energy
requirements, it is because they are unable to meet their own needs. And of course, there is the possible political push back
from US consumers if the price they pay on goods with a large Canadian export
content goes up dramatically.
In the case of
northern Ontario, the short-term effects will be mitigated by public sector
activity. For example, in major urban centres
like Thunder Bay and Sudbury, a lot of employment is already either directly
public sector or is based on economic activity from government contracts. For example, Thunder Bay is in the midst of a
construction boom driven by government housing money and a new provincial jail,
and its transit
car manufacturing just received another government funding boost. The long-term is another matter if the
country and province go into recession.
So, we will have to wait and see what the ultimate impact
will be. The more curious question is why President Trump is so set on such
tariffs given the damage they will inevitably inflict on the economy of America’s
closest ally and trading partner as well as the American consumer in
general. My guess is he is gambling that
Canadian exporters may lower their prices to maintain competitiveness and market share in the
face of American tariffs thereby sparing American consumers much hard ship.
Combined with this will be the inevitable further depreciation of our dollar
that will also make our exports to the United States cheaper.
The tariff revenue is probably expected to compensate for the drop in income tax revenues given that Trump wants to implement income tax cuts.
And, inevitably with tariffs, more companies will relocate their operations
from Canada and Mexico back to the United States thereby creating jobs for Americans.
Is this indeed Trump's master plan? We
shall see.
