Escalating U.S. protectionism would shrink economies of Canada, Mexico, report says

A new analysis of escalating trade disputes involving the United States warns that a deterioration into an all-out, global trade war would knock North America's economies into recession.

The report by Scotiabank said if the U.S. breaks all trade ties with its partners — and imposes across-the-board tariffs that average 20 per cent — then Canada and Mexico would see their economies contract in 2020.

For Canada, it predicts the economy would shrink 1.8 per cent. 

"A ramp-up in protectionism in the U.S. results in a negative impact on growth in each of the NAFTA partners' economies," said the report, co-authored by Scotiabank's Brett House, Juan Manuel Herrera, René Lalonde and Nikita Perevalov.

Under the most aggressively protectionist scenario, the U.S. economy would contract by 0.1 per cent in 2020, the report said. Any of the scenarios in which tariffs are applied would lead to the U.S. growing less robustly than it should.

This worst-case scenario is one of several potential outcomes examined by Scotiabank.

Experts have been trying to gauge the economic consequences of the intensifying trade fight between the Trump administration and traditional American allies like Canada.

U.S. tariffs infuriate allies

Earlier this month, the U.S. imposed significant tariffs on steel and aluminum imports from other countries, including Canada, Mexico and the European Union. Washington is now threatening to introduce more duties — this time on automobiles.

The move has infuriated allies and has prompted them to retaliate with tariffs of their own on U.S. imports.

On Friday, U.S. President Donald Trump went further by slapping a 25 per cent tariff on up to $50-billion US worth of goods from China. The tariffs are set to take effect July 6 and would push the world's two largest economies closer to a trade war.

Throughout this turbulence, a separate economic sting has persisted because of uncertainty as Canada, Mexico and the U.S. stalled in their efforts to renegotiate the North American Free Trade Agreement.

Telling stats on trade battle

As experts try to get a handle on the economic impacts, here are some telling numbers about the deepening trade battle:

• 0.2 percentage points — the reduction to Canada's growth in gross domestic product in 2019, if NAFTA falls apart and 3.8 per cent tariffs are imposed across the board, according to Scotiabank's recent report.
• 0.4 percentage points — the reduction to Canada's GDP growth in 2020, if NAFTA falls apart and 3.8 per cent tariffs are imposed across the board.
• 0.2 percentage points — the reduction to Canada's GDP growth next year, if NAFTA talks extend past the second quarter of 2019 and tariffs on steel, aluminum and autos are in place, Scotiabank estimates.
• 1.8 per cent — the size of the contraction for the Canadian economy in 2020 if the U.S. launches an "all out" global trade war with an average of 20 per cent tariffs across the board with all partners, according to Scotiabank.
• 3.1 per cent — the share of Canada's total merchandise exports affected by U.S. steel and aluminum tariffs, according to data provided by Export Development Canada's deputy chief economist Stephen Tapp.
• 0.7 per cent — the share of Mexico's total merchandise exports affected by U.S. steel and aluminum tariffs.
• 0.4 per cent — the share of the E.U.'s total merchandise exports affected by U.S. steel and aluminum tariffs.
• 0.1 per cent — the share of China's total merchandise exports affected by U.S. steel and aluminum tariffs.
• $12.4 billion — the value of Canada's steel and aluminum exports to the U.S. in 2017, Tapp says.
• $2.9 billion — the value of Mexico's steel and aluminum exports to the U.S. in 2017.
• $7.7 billion — the value of the E.U.'s steel and aluminum exports to the U.S. in 2017.
• $2.8 billion — the value of China's steel and aluminum exports to the U.S. in 2017.