After tariffs were delayed, RBC’s Chief Economist Frances Donald spoke with Ram Amarnath, Co-Head of Global Financial Sponsors and Head of Canadian Diversified Industries at RBC Capital Markets, about the potential impact of 25% tariffs on the Canadian economy and what corporations, investors and policymakers in Canada and the U.S. need to think about in the weeks and months ahead.
Below is an excerpt from their discussion.
Amarnath: Given tariffs are now delayed, how does that change the way you're thinking about this situation? What do you think we'll see over the next month?
Donald: One of the challenges we hear is that when the first Trump administration put tariffs in place in 2018-2019, there was no inflation, no big catastrophe. In part, that's because the magnitude of those tariffs was so small compared to this 25% across the board.
For example, China is about 15% of U.S. trade but Mexico and Canada are a combined 30%, so you’re tripling the band on imports heading to the U.S. One measure economists use is the average import tariff for Americans. In 2018, that number rose from 1.5% to 3%, and had these 25% tariffs gone through, that number would've gone up to 11%. That's a quadrupling of tariffs that we did not see in 2018-2019.
It's particularly problematic because it targets a manufacturing base that sees products cross borders up to seven to eight times, meaning tariffs hit multiple times. This is the highest increase in an average ratio that we've seen since 1943, so we narrowly avoided (for now) one of the largest shocks in almost 100 years to the North American trading system.
Still, we did learn some things from 2018-2019 – that currency can offset a little bit of the pain; that behaviour of inventory hoarding; that behaviour of uncertainty and how it flows through. Some even point out that by the end of 2019, we were starting to see manufacturing weaken and some prices coming up, but then COVID wiped the slate clean on a bunch of data. So yes, there are lessons we’re using from 2018, but it's really a quarter of what we would've seen if 25% tariffs were enacted.
