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.
