Welcome to Need to Know, The Hub’s roundup of experts and insiders providing insights into the economic stories and developments Canadians need to be keeping an eye on this week.
No good outcomes in a Canada-U.S. trade war
By Trevor Tombe, professor of economics at the University of Calgary and a research fellow at The School of Public Policy
Canadians can be forgiven if all the talk about Donald Trump’s tariffs still seems academic at this point. But make no mistake: if they are enacted as planned, the effects may not be immediately felt, but in the long term, they will be unavoidable.
From the China-U.S. trade dispute, we know that much of the tariff impact is borne by U.S. consumers. So the economic effect in Canada would take time since it would result mainly from falling import demand in the U.S. as consumers/businesses shift to other suppliers. But how long that is, I don’t know. Papers examining the China/U.S. experience tend to report effects at the 12-month mark, so it can take quite a bit of time for things to shake out.
The more rapid response in Canada is, I suspect, going to be business investment falling dramatically in Q1 due to the high level of uncertainty that this creates.
Another issue for Canada is the exchange rate. Unless it’s already priced in, a full across-the-board tariff could lower the dollar value by several cents. That would immediately make many imported items more expensive (fruit and vegetables come to mind especially now). We could see the effect very soon on those items becoming costlier.
The bottom line is that if Trump’s tariffs do come into effect on his proposed February 1 date (a big if), get ready for some serious groans in the grocery checkout lines.
Careful, Canada—tariff retaliations will backfire
By Joseph Steinberg, associate professor of economics at the University of Toronto
With the Liberal leadership race underway and a federal election approaching, Canadian politicians are declaring their allegiance to “Team Canada” and vowing to retaliate if President Trump imposes tariffs on our exports. I’ve spent my career studying the macroeconomic consequences of tariffs and other trade policies, and my research indicates that retaliation is a bad idea.
During the first Trump administration, I developed a model to simulate what would happen if President Trump made good on his threat to terminate NAFTA (see my article in the Canadian Journal of Economics for more information). When President Trump recently proposed 25-percent tariffs on all Canadian exports, I used the model to study how this would affect our economy and what would happen if we retaliated.
I found that 25 percent tariffs on Canadian exports would reduce our gross domestic product by about five times more than that of the United States. However, “dollar-for-dollar” retaliatory tariffs on American exports would also hurt the Canadian economy about five times more.
This asymmetry stems from the importance of U.S.-Canada trade to our economy. While both nations export similar amounts to each other, Canada’s economy is roughly ten times smaller. This makes us far more vulnerable to trade disruptions on either side of the border but also implies that we have the most to gain from further integration.
A tit-for-tat trade war could lead to devastating consequences for Canada, whereas the U.S. economy could easily absorb the fallout. Instead of retaliating, Canada should focus on reducing distortions that restrict Canadian consumers’ access to U.S. products and insulate Canadian producers from competition from U.S. firms. This would give President Trump a win, which could be seen as capitulation, but Canadian consumers would be the real winners.
Canada’s overloaded immigration system
By Louis-Philippe Beland, associate professor of economics at Carleton University
President Trump’s executive order barring new asylum claims in the U.S. and expediting deportations could heavily impact Canada’s already strained immigration system. With limited options to claim asylum south of the border, many may turn to Canada, further overburdening an overloaded system. As of December 2024, Canada’s asylum backlog stands at approximately 260,000 cases. The Parliamentary Budget Officer estimates the average cost for each asylum claimant from visa-exempt countries is $16,500, with processing times averaging over 24 months. Provinces like Quebec and Ontario spend millions annually on emergency housing, health care, and education for asylum seekers, despite about 43 percent of claims being rejected. To manage a potential surge, the federal government is considering using provincial jails for asylum seekers with criminal records.
Canada’s immigration system, once a global leader due to its points-based selection system, has faced mounting strain since 2021. Relaxed visa requirements, record-high intakes, and increased reliance on unskilled temporary foreign workers have overwhelmed housing, health care, and education systems. Recent caps on international student permits and fewer pathways to permanent residency further weaken Canada’s skilled labour pipeline.
These challenges arise amid economic uncertainties, including potential U.S. tariff wars, which could increase unemployment and heighten social pressures. Efficient immigration processing and strategic reforms are urgently needed to alleviate public service costs and sustain Canada’s ability to attract and integrate skilled talent effectively.
