Key Takeaways:
- U.S. President Donald Trump’s threat to impose a 100% tariff on Canadian exports if Canada signs a trade deal with China is considered an "empty threat" by economist Derek Holt.
- The threat is unclear and lacks specifics, and its implementation would have devastating effects on U.S. businesses and industries.
- Canada is not pursuing a free trade agreement with China, and the Canada-U.S.-Mexico Agreement (CUSMA) requires prior notification for such deals with non-market economies like China’s.
- The imposition of tariffs would lead to enormous pressure for retaliation, market instability, and a potential loss of faith in the U.S. institutional framework.
- Canada’s efforts to diversify its trade away from the U.S. are ongoing, with the share of total Canadian exports to the U.S. falling from 85% to 67% over the past quarter-century.
Introduction to the Threat
U.S. President Donald Trump’s recent threat to impose a 100% tariff on Canadian exports if Canada signs a trade deal with China has been met with skepticism by economist Derek Holt. In a note to clients, Holt argues that the threat is "an empty threat" and would never be realized due to various economic and legal reasons. The threat was made in a social media post on Saturday, in which Trump referred to Prime Minister Justin Trudeau as "Governor Carney," consistent with a recent, more acrimonious turn in the relationship between the two leaders.
The Economic Impact
The imposition of a 100% tariff would have devastating effects on many U.S. businesses and industries, according to Holt. He cites an auto parts executive warning that the lower tariffs proposed earlier last year would have resulted in millions of layoffs, mostly in the U.S. Applying this reasoning across multiple industries, Holt argues that it could no longer be economical to supply oil and gas, hydro, any resources, or any manufactured product or service. Supply chains could freeze across multiple industries, leading to millions of American workers being laid off. The impact would be felt across various sectors, including manufacturing, energy, and services, and would have a ripple effect throughout the entire economy.
Retaliation and Market Instability
The imposition of tariffs would also result in enormous pressure to invoke major retaliation, including from federal and provincial governments and consumers, according to Holt. This retaliation could take various forms, including tariffs on U.S. exports to Canada, and could lead to a trade war between the two countries. Furthermore, the implementation of a massive new tariff could have a similar market effect as the "Liberation Day" tariffs, where indices, the U.S. dollar, and U.S. treasury yields fell. Markets may lose faith in the U.S. institutional framework, view it as having much higher country risk, and sell assets across the board towards a new equilibrium that reflects higher risk.
Diversification and the Future of Trade
Despite the threat being considered "not remotely credible," Holt argues that it still justifies an ongoing effort to adjust Canada’s approach to trade. "Instability only adds to the case to diversify away from the U.S.," Holt concluded. This diversification effort is already underway, with the share of total Canadian exports that go to the U.S. having fallen from 85% about a quarter-century ago to 67% today. This trend is expected to continue over the next decade, with Canada seeking to expand its trade relationships with other countries, including those in Asia and Europe.
Conclusion and Next Steps
In conclusion, Trump’s threat to impose a 100% tariff on Canadian exports is considered an empty threat by economist Derek Holt. The threat lacks specifics, and its implementation would have devastating effects on U.S. businesses and industries. Canada is not pursuing a free trade agreement with China, and the CUSMA requires prior notification for such deals with non-market economies like China’s. As Canada continues to diversify its trade away from the U.S., it is essential to monitor the situation and be prepared for any potential developments. The ongoing trade tensions between the U.S. and Canada highlight the need for a stable and predictable trade environment, and it is crucial for both countries to work towards a mutually beneficial trade relationship.
