Welcome to Need to Know, your Saturday dive into thought-provoking research from think tanks, academics, and leading policy thinkers in Canada and around the world, curated by The Hub. Here’s what’s got us thinking this week.
In just two days, the self-described “Tariff Man” will return to the Oval Office. On day one, Donald Trump has promised to impose tariffs on Canada and Mexico, stating on social media that, “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders.”
Economist Stephen Miran, Trump’s appointment to chair the Council of Economic Advisors, has argued that the U.S. should use tariffs and currency devaluation to correct trade deficits and the decline of American manufacturing. His argument cites work that suggests that an “optimal” tariff rate for the U.S. where benefits are maximized is around 20 percent and possibly as high (but not exceed) 50 percent. The key, and something Miran admits, is that if other countries start retaliating, which history says they will, the welfare gains from the higher tariffs are erased. Thus, Miran argues that the U.S. will need to tie its defence commitments to states not retaliating.
If the views of Miran sound completely destabilizing to the remaining vestiges of the prevailing rules-based international order, it’s because they likely will be.
We will soon find out how serious these tariff threats are and what Trump is actually hoping to achieve with them. However, the fact that he is willing to be so combative with America’s top two trading partners should give pause to what the future of global trade looks like. In a world that has benefitted immensely from open trade flows and integrated supply chains, it is unclear whether there is any real material benefit to throwing a tariff wrench into the well-oiled trade machine.
This is not to say that tariffs or export restrictions are never justified. They can be warranted on security grounds. But let’s not pretend there are any legitimate security grounds for the U.S. to apply tariffs on Canada. The reality is that tariffs are simply a tax levied on goods and services, and like all taxes, they raise costs. With this in mind, let’s look at how high these costs could be.
How much will Trump’s tariffs hurt Canadian pocketbooks? A new report by University of Calgary economist and Hub contributor Trevor Tombe highlights the critical economic interdependence between Canada and the United States, underscoring the mutual benefits of our trade relationship. The study emphasizes Canada’s role as a key and reliable trading partner for the U.S., particularly in supply chain integration. Tombe’s report finds that 63 percent of Canadian exports to the U.S. are intermediate goods (i.e., products used as inputs in the production process to create final goods or services), which are vital for American manufacturing and competitiveness. Approximately 12 percent of the value of Canadian exports to the U.S. originates from American inputs, demonstrating the shared nature of their economic production. The analysis warns against the potential impact of protectionist policies, such as the proposed 25 percent U.S. import tariff and Canadian retaliation, which could lead to significant economic disruptions. The study estimates Trump’s tariffs and retaliation would reduce Canadian real income by 2.6 percent and U.S. real income by 1.6 percent. This translates into a per-person economic cost of $1,900 CAD and $1,300 USD. Tombe advocates for continued collaboration, highlighting that Canada invests heavily in the U.S., with Canadian direct investment exceeding $1 trillion. The report warns against protectionism to safeguard the shared economic resilience of both nations, emphasizing that open trade policies foster productivity, innovation, and long-term prosperity. Tariffs will hit low-income Americans the hardest A recent Peterson Institute for International Economics (PIIE) policy brief critically examines soon-to-be President Donald Trump’s proposed tariff policies and their potential economic repercussions. Authored by Kimberly Clausing and Mary Lovely, the study warns that Trump’s suggested “across-the-board” 10 percent import tariffs, alongside up to 60 percent tariffs on Chinese goods, would disproportionately harm low- and middle-income Americans. They argue that tariffs, which effectively act as a consumption tax, would reduce after-tax income for the bottom half of U.S. households by approximately 3.5 percent, costing a median household at least $1,700 annually. The study highlights that tariffs burden domestic consumers rather than foreign exporters, raising the prices of imported goods. Despite Trump’s claims that tariffs benefit American workers and industries, the brief notes no significant job creation resulting from his 2018–19 tariff hikes. Instead, sectors dependent on imported inputs, such as manufacturing, experienced reduced competitiveness and job losses. The analysis estimates that the proposed tariffs would generate $500 billion in additional annual costs for consumers, equating to nearly 2 percent of GDP. Moreover, they say the revenue raised by these tariffs would fall short of offsetting the tax cuts Trump proposes to extend, exacerbating fiscal imbalances. In addition to their economic costs, tariffs don’t appear to be popular. According to a recent Angus Reid poll, the challenge for Trump’s tariff plans will be that only one in four t Americans (26 percent) support placing tariffs on Canada. Even among Americans who support the tariffs, if they end up raising the price of goods like gasoline, 62 percent of tariff supporters say they would change their minds. In normal times, high costs with little broad-based political support would make such policies dead on arrival. However, these are not normal times. Can we please end interprovincial trade barriers once and for all? Finally, with the looming economic threat of Trump’s tariffs, now would be a great time to get on with removing interprovincial trade barriers. These barriers include things like government wholesale monopolies and certification requirements. They are most prevalent in areas like procurement, labour mobility, trucking, agriculture, and agrifood. While we’re all focused on the looming costs of protectionism abroad, we should not forget that interprovincial trade barriers also take money out of Canadian pockets. A recent analysis by National Bank chief economist Stéfane Marion highlights just how much these barriers cost us. While Canada has actively pursued free trade agreements with more than 40 countries since 1989, progress in liberalizing trade between provinces has lagged. Internal trade within Canada now accounts for just 40 percent of total trade, down from 50 percent in the early 1980s, largely due to non-geographic barriers equivalent to a 21 percent tariff, according to a 2019 IMF study. Marion argues that eliminating these obstacles could increase interprovincial trade to levels comparable with international trade and boost Canada’s GDP per capita by an estimated 3.8 percent. He suggests that a “coalition of the willing” among provinces could accelerate reforms, attracting more investment and enhancing access to the domestic market. “It’s time to stop scoring own goals and start unlocking our full economic potential,” he concludes. ChatGPT assisted in the creation of this article.
Taylor is The Hub’s Research and Prize Manager. He is a Ph.D. candidate in Political Science at the University of Toronto. He has worked with several think tanks in Canada and the U.S. and previously served as a senior advisor to the Ontario Minister of Finance.
