Trump's tariff plan would shave almost a half-point off Canada's economy, says U.S. forecast

What exactly would Donald Trump's tariff plans do to Canada? A prominent Washington think-tank has an answer — and it's not pretty.

The Peterson Institute for International Economics released a sprawling report Thursday calculating the effect Trump's policies might have on different countries.

It weighs the Republican presidential candidate's call for a minimum tariff of 10 per cent on all global imports, the mass deportation of undocumented workers and his stated desire to have more power over setting interest rates.

Following his election in 2016, Trump, "by and large, made good on his nationalist and protectionist trade and immigration policy campaign promises," says the paper, co-authored by three researchers at the institute.

"The tenor of these [2024] policies and Trump's track record of keeping his promises justify analyzing their potential impact."

The Canadian government has worried, in particular, about the tariffs. It's even had informal talks with Trump's circle about how to avoid them, should he regain the presidency.

The think-tank tried measuring their cross-border effect. The findings come with some caveats but here's the bottom line on the tariffs: 0.4 per cent of Canada's economy would disappear immediately, the effect would last for years, and employment would fall nearly 0.75 per cent, with a loss of up to $60 billion US over the first three years.

"The dependence of Canada and Mexico on the U.S. market is clearly shown [here]," says the report.

But these policies wouldn't help the U.S. either, it says. In fact, the tariffs would do more economic damage to the U.S., in total dollars, than anyone, it concludes.

The Peterson Institute is well-known and often quoted in Washington policy-making circles, with respected analysts, albeit with a generally pro-trade, anti-tariff inclination.

'A bargaining chip'

Now here are some of the caveats.

Trump's tariff policies are woefully ill-defined. He has not specified which products might be subjected, or exempted, and hasn't said what mechanism he'd use to impose them, although his supporters argue existing law lets him snap them into place. 

That fuzziness may be intentional.

A leader of Trump's presidential transition team says he will impose tariffs on some things — but not on everything.

The goal here is twofold, Howard Lutnick, the team's co-chair, told CNBC earlier this month: Steer certain manufacturing back to the U.S., and use tariff threats as leverage, to force other countries to drop their own trade barriers.

"Of course it's a bargaining chip," said Lutnick, who is also the CEO of the financial services giant Cantor Fitzgerald, when pressed for details.

"When you're running for office, you make broad statements so [voters] understand you." But he said Trump doesn't actually want the price of everything to rise, and views tariffs as a tool.

"Everybody else is going to negotiate with us," Lutnick said.

Pros and cons

It's easy to envision the requests Canada might face. U.S. officials, of both parties, have complained about Canada's dairy and auto-parts policies, digital taxes and military spending and — under Trump — could threaten tariffs.  

Lutnick drove home his point with a non-Canadian example. He said Europe and Japan have huge tariffs on American cars, and Trump can threaten them to get those tariffs lowered.

Here's a second caveat: Trump's own public comments suggest he could use these tariffs in broader, less discriminate ways.

Manufactured goods, in particular, are seemingly in his crosshairs. For example, at a campaign event this week in Pennsylvania, Trump threatened to slap penalties on imports of John Deere farm vehicles built in Mexico, and on Mexican-built cars. Such action would threaten the North American trade agreement.

"You'd better stay in Michigan," Trump said, in a warning to auto companies thinking of building plants in Mexico.

There's a third, and final, caveat involving the unintended consequences of Trump's actions, from potential trade wars to the effects of mass deportation.

If there's any mitigating effect for Canada in this report, this is it. The Peterson paper argues that Trump's other policies would damage the U.S. and send investment elsewhere. 

If enacted, the mass deportation of undocumented workers, and greater presidential control over the independent Federal Reserve, could cost the U.S. economy trillions, it says, with American agriculture and manufacturing suffering the most.

Canada could even see a tiny net benefit to its economy — the paper says investment would trickle out of the U.S. and Canada's economy could even grow by a few billion dollars a year.

"Ironically, despite his 'make the foreigners pay' rhetoric, this package of policies does more damage to the U.S. economy than to any other in the world. They result in lower U.S. national income, lower employment, and higher inflation than otherwise," says the report.

"In sum, while Trump promises to 'make the foreigners pay,' our analysis shows his policies will end up making Americans pay the most." 

It bears repeating: This is all based on the assumption that Trump actually intends, if elected, to do these things he says he wants to do.