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Canada Spared the Worst on “Liberation” Day, but Uncertainty and Mayhem Continue

Canadian Economics

By: CBoC Economics Team

After months of teasing his reciprocal tariff approach, President Trump finally unveiled his plan. While Canada was spared from the worst, many other countries were hit with tariffs well above even the highest of expectations. This upheaval in global trade will significantly weigh on economic growth around the world, with the United States likely the biggest loser.

Mayhem: What was announced

  • The United States implemented new tariffs on nearly all countries, lifting its average tariff rate up 20 percentage points to a near century-high level.
  • While the tariffs were dubbed reciprocal, the formula used to implement them was crude and lacked any sound economic basis.
  • Tariffs ranged from a minimum of 10 per cent—applied to countries with which the United States has little to no trade deficit or even a surplus—to as high as 50 per cent with Lesotho.
  • Many of the world’s largest economies were targeted, exposing the United States to significant retaliation risk. The E.U. faces tariffs of 20 per cent, China 54 per cent (when combined with previous tariffs), India 26 per cent, and Japan 24 per cent.
  • Tariffs were particularly steep for many emerging markets in Asia, which are key to global supply chains that provide inexpensive goods.
  • The 25 per cent automotive tariffs announced last week will be implemented as of midnight on April 3rd, and steel and aluminum tariffs remain in place. These tariffs are especially hurtful to Canada.
  • However, Canada and Mexico were spared from new tariffs. CUSMA compliant goods will continue to be tariff free, while non-CUSMA compliant goods will face a tariff of 25 per cent for non-energy, and 10 per cent for energy. In effect, most Canadian exporters can easily become compliant.

A shallow sigh of relief: What it means for Canada

  • At first glance, Canada can breathe a sigh of relief, as the broad expectation had been that 25 per cent duties would be applied on all exports to the United States.
  • However, tariffs on automobiles and parts are expected to have the strongest impact—and they remain in place. Our analysis indicates that if automotive tariffs remain in place for one quarter, auto and parts exports would fall by over one half.
  • Steel and aluminum, and products using those metals will continue to face steep tariffs, further weighing on Canada’s economic performance.
  • While other industries may welcome the announcement, the reality isn’t so rosy. Although Canada now has a more competitive export position relative to most other countries, the sheer scale of the tariffs will weigh heavily on global economic growth—potentially hitting the United States the hardest.
  • This means that Canadian exporters of resources, which might have been able to shrug off a 10 per cent tariff given U.S. reliance on these goods, will now face headwinds from weaker global demand.
  • Canada has responded by announcing matching tariffs on U.S. content on vehicles, on top of $60 billion in previously announced retaliatory measures that remain in place.
  • Canada is not out of the woods. During his speech, President Trump continued to push the false narrative that Canada is an unfair trade partner and once again called for American farmers, specifically dairy producers, to have more access to Canadian consumers.
  • Given the uncertainty surrounding trade with the United States, it remains important for Canada to diversify trade beyond the United States.
  • Overall, while yesterday’s tariff announcement seemed to be favourable to Canada, tariffs on key sectors—including others that are likely to follow—coupled with what seems to be a worst-case outlook for U.S. and global growth will hurt Canada’s economy. Consumer and business confidence had already sunk to recession lows, hurting the economy even before what’s now become a global trade war.

Self-destruction initiated: What it means for the United States

  • The history books are likely to give “liberation day” a different name. While the idea around reciprocal tariffs were dubious even before they were announced, what was announced seems set to maximize U.S. pain.
  • The application of tariffs also brings to question the ability for countries to negotiate. Tariffs were not imposed based on government policies restricting U.S. goods, but were calculated using a crude formula based on bilateral trade deficits. These deficits, in most cases, simply reflect the income differential between the two trading partners.
  • In practice, these tariffs will have widespread inflationary impacts and weaken U.S. growth. For example, tariffs nearing 50 per cent on Lesotho, Cambodia and Vietnam—countries that primarily export inexpensive goods to the United States—will only make these products more expensive. The United States will not succeed in bringing these industries back in a meaningful way. In fact, relocating clothing production to other countries has significantly increased the purchasing power of U.S. consumers.
  • The removal of the de minimis exemption with China, as well as a whopping 54 per cent total tariff rate on the country all but stifles trade between the two countries. Many U.S. imports from China simply cannot be sourced from other countries quickly—if the world could replace Chinese manufacturing power, it would have done so already.
  • Given the widespread nature of these tariffs, U.S. consumers will have no safe haven from tariffs and inflation will surely spike significantly. While President Trump insists that manufacturers should simply make their products in the United States, the fact that tariffs lean heavily on countries that produce products that America cannot profitably produce, like clothing, will guarantee higher prices.
  • There are also questions surrounding the end game for America. These tariffs were primarily meant to spur investment back to the United States, but to date there’s no indication that’s the direction things taking. Since the tariff uncertainty began in January, U.S. stocks have underperformed most global peers, and the U.S. dollar has largely lost ground against other currencies, including the Canadian dollar as of the morning of April 3rd. That flight of capital out of the United States is unlikely to coincide with an investment renaissance. The opposite is more likely, especially as business investment costs spike due to these tariffs. Meanwhile, U.S. consumers are set to see their buying power greatly reduced with the combination of job loses, lower income and higher inflation.
  • If dollar weakness persists, the impact on inflation in the United States will be even steeper. When the idea of tariffs was first floated, the thinking was that this would strengthen the U.S. dollar, making Americans wealthier and better able to handle the tariffs. A weaker dollar changes the math significantly and increases the pain.
  • Overall, the way these tariffs were implemented could be crushing to the U.S. economy. They all but guarantee a significant increase in inflation as consumers have few alternatives given the breadth of tariffs. Businesses, meanwhile, are likely to avoid the United States as an investment destination, and tariffs on inputs, plus retaliation, will surely weigh on profit margins of U.S. companies. These two factors are likely to coincide with a broader decline in U.S. wealth, as investors move capital to safer assets outside of the United States.

A bleak outlook: What it means for the world

  • The most surprising part of the tariffs is their breadth and the extent to which they impact low-income countries—where trade deficits are explained by income differentials rather than barriers to trade.
  • Over the past three decades, globalization has helped all boats rise by increasing the purchasing power of consumers in developed economies, while reducing poverty in many developing economies. Trump’s tariffs, coupled with cancelling USAID to many countries will move the world in the opposite direction, hitting many of the world’s most vulnerable countries by increasing poverty rates.
  • From an economic perspective, global growth is also set to weaken. Many companies around the world have moved production to optimize supply chains and take advantage of the relative strengths of different countries, both in terms of costs and productivity. These tariffs upend many of those decisions and will force a costly restructuring of global supply chains, leaving stranded assets across the world.
  • On the other hand, new trading opportunities may emerge for some countries, perhaps resulting in some winners. Co-ordinated retaliation against the U.S. exports could improve some countries’ competitiveness, and for some, lower U.S. demand for global products could lower prices for other importing countries, helping combat inflation.
  • The most concerning outcome may be the broader disruption of the global order. U.S. allies were already worried about the state of their relationships, and higher-than-expected tariffs will increase the unease. In addition, the U.S. has often used trade and its economic might to steer the policies of adversaries—these tariffs will undermine that leverage.
  • Overall, should these tariffs be maintained, the world economy will go through a painful restructuring that will weigh on growth. Supply chains will need to move, leaving stranded capital assets across the world. The world has benefitted from open global trade—moving away from it is inevitably damaging. Fast growing Asian economies seem to be especially at risk, given their high tariff rates, with the U.S. economy likely to be among the most impacted.
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