Welcome to Need to Know, The Hub’s roundup of experts and insiders providing insights into the developments Canadians need to be keeping an eye on.
Today’s weekend edition dives into thought-provoking research from think tanks, academics, and leading policy thinkers in Canada and around the world. Here’s what’s got us thinking this week.
Well, we’ve survived a few more weeks without President Trump implementing economically devastating tariffs on Canada. It’s increasingly clear that the best words to describe what we can expect from the remaining three years and 49 weeks of Trump’s second term are “uncertainty” and “chaos.” If Trump is willing to tariff his top two trading partners, who’s to say he won’t also put tariffs on America’s other allies like E.U. countries? In fact, he’s already mused about it. America’s long-term allies are now in a world of preparing for the worst and hoping for the best.
Put simply, the probability that there will be a full-fledged global trade war in the next few years is no longer trivial and is rising. With that in mind, let’s take a look at some research that has tried to quantify just how economically damaging a global trade war would be.
The economic pain of a global trade war
How much would a global trade war cost? Research by Indiana University professor Ahmad Lashkaripour, published in the Journal of International Economics, presents a novel approach to measuring the economic impact of a global tariff war, where multiple countries raise their import tariffs. He finds that the cost of these conflicts has more than doubled over his 15-year sample—from 2000 to 2014–with small, trade-dependent economies being the most vulnerable.
His model assumes that countries apply different tariff rates in the event of a global trade war, based on their economic composition. Overall, Lashkaripour assesses tariff war consequences across 44 countries and 56 industries.
He finds that a global tariff war could shrink the average country’s real GDP by 2.8 percent, with the total global cost amounting to $1.7 trillion in 2014—comparable to the entire economic output of South Korea.
In addition, small, downstream economies, such as Estonia and Latvia, would be disproportionately affected due to their reliance on imported intermediate goods. The potential worst-case scenario of GDP losses for these countries could exceed 10 percent.
The estimates for Canada are that real GDP would fall by 2.76 percent. Recall that Canada’s GDP fell by 5.2 percent during the COVID-19 pandemic, and the rebound from that shock was relatively quick once the economy was reopened. As University of Toronto economist Joseph Steinberg lays out in a recent Hub article, a prolonged trade war would see deleterious economic consequences lasting for years, meaning that the economic damage from a global trade war would be far greater than the pandemic.
Lashkaripour’s research highlights the growing economic risks posed by protectionist policies and underscores the need for international cooperation to mitigate the adverse effects of tariff escalations.
However, his economic costs don’t capture the full costs of a trade war. Political scientists have long understood that there are peace-enhancing benefits to international trade, since economic interdependence raises the cost of conflict. If we end up in a global trade war, expect global security to deteriorate, too.
The economic costs of adjusting to freer trade are short-lived
In trying to understand the logic behind the U.S. tariff push, one often comes across arguments that trade destroys domestic jobs. However, while there may be some trade-induced job losses in the short run after new agreements are signed, new evidence from Canada suggests that these might be short-lived.
Taking a step back in time, the 1989 Canada-U.S. Free Trade Agreement (CUSFTA) reshaped the Canadian labour market, but its long-run effects have been more nuanced than many feared. A new study by economists Brian K. Kovak and Peter M. Morrow from Carnegie Mellon University and the University of Toronto, respectively, published in the Review of Economic Studies, leverages 20 years of longitudinal worker-firm data to analyze the impacts of that trade deal on Canadian workers.
The study finds that the resulting Canadian tariff cuts led to increased layoffs, particularly for workers in large firms within industries that then faced higher import competition. However, these job losses did not translate into long-term earnings declines. Most displaced workers quickly found employment in other manufacturing industries, construction, or services, largely offsetting any negative effects. At the same time, they found corresponding U.S. tariff reductions benefited Canadian workers by increasing export opportunities, which helped stabilize employment.
Canada’s labour market proved more adaptable than the large and persistent job losses seen in the U.S. from China’s trade shock. Workers transitioned relatively smoothly across industries, aided by the bilateral nature of CUSFTA. Those laid off from import-competing industries often found new jobs in export-oriented sectors that benefited from U.S. tariff reductions.
The findings challenge the conventional wisdom that trade liberalization leads to prolonged labour market distress. Instead, they suggest that well-structured trade agreements can actually balance the effects of import competition with new export opportunities, leading to minimal long-term employment disruptions. The study underscores the importance of labour mobility and market flexibility in mitigating the risks of trade liberalization.
Trump’s tariff increases are the largest since the 1920s
When it comes to studying the history of U.S. trade policy, there are few better than economist Douglas Irwin. In a recent analysis, Irwin puts Trump’s tariffs into historical perspective. In a move reminiscent of the 1930 Smoot-Hawley Tariff Act, he shows how Trump’s sweeping tariffs on Canada, Mexico, and China would significantly elevate the average duty on dutiable imports (those that tariffs are charged on) by 9.9 percentage points. The average tariff on dutiable imports would rise 9.9 percentage points, from 7.4 percent to 17.3 percent.
This increase surpasses the impact of Smoot-Hawley, which raised tariffs on dutiable imports by approximately 5.4 percentage points, though it began from a higher baseline (35.7 percent to 41.1). Today’s escalation marks one of the most substantial shifts in U.S. tariff policy in nearly a century. One would have to go back to 1922 with the Fordney McCumber Tariff to find a greater percentage point increase in U.S. tariff rates, when the average tariff on dutiable imports rose 17.8 points, from 21 percent to 38.8 percent.
However, Trump’s tariffs would have a much greater impact on the U.S. economy, because supply chains and the use of intermediate imports are now much more prominent in production networks. For instance, Trump’s tariffs would roughly hit dutiable imports equal in value to 4.8 percent of American GDP, while the Smoot-Hawley and Fordney McCumber tariffs only applied to imports that were 1.4 and 1.3 percent of the U.S. economy, respectively.
Historically, substantial tariff increases have had mixed outcomes. The Smoot-Hawley Tariff, for instance, is often cited as a factor that exacerbated the Great Depression by stifling international trade. The current administration’s approach signals a departure from decades of U.S. policy favouring trade liberalization. As these new tariffs likely take effect, their long-term implications for both the U.S. and the global economy remain to be seen, but they likely won’t be good.
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…
