With U.S. President Donald Trump reiterating his pledge to impose tariffs on Canadian goods, Canadian policymakers and business leaders are bracing for economic turbulence.
They may not have a choice. Uncertainty alone, economist Trevor Tombe warns, is enough to dampen investment and slow growth, even before a single tariff is imposed.
Tombe, a professor of economics at the University of Calgary, has become one of Canada’s foremost authorities on economic policy. He regularly contributes columns to The Hub media outlet and has amassed a substantial following on social media.
On Feb. 27, the University of Calgary’s School of Public Policy hosted a group of expert panelists to discuss Canada’s productivity challenges at Ottawa’s Château Laurier hotel. Canadian Affairs reporter Samuel Forster spoke with Tombe at the Productivity Initiative event to understand Canada’s options for responding to a trade war.
This interview has been edited and condensed for clarity.
SF: President Trump has delayed the imposition of tariffs multiple times now. What reverberations have we seen in the Canadian economy since the tariffs were first announced?
TT: Uncertainty lowers investments. There’s considerable research [showing] that you’re going to pause large-scale investment on any asset or activity, especially if it’s tied to exports.
We haven’t gotten the data yet in terms of what business investment has been early this year. But it’s almost surely going to be quite a bit lower, just as a result of the uncertainty itself.
[Some indicators of] uncertainty suggest it’s higher now than in the worst moment early in 2020, in Covid, when investment did fall off a cliff.
So we’re potentially going to see that in the first quarter of this year, where investment just drops sharply in Canada, and that means lower economic growth, lower employment across the board, even if tariffs don’t actually get implemented at all.
SF: Do Canadian businesses and policymakers have any choice but to act as though the tariffs will eventually come into effect?
TT: We have only limited ability to influence U.S. policy. We can, of course, engage with them directly and diplomatically, as the Canadian government and provincial governments are doing. But that’s the most that we can do.
Our ability to retaliate is incredibly limited because of our small size. And the types of measures we would have to turn to — to actually cause some real disruption there — would hurt us substantially more, like blocking oil and gas exports as just one example.
So how we should respond, I think, needs to focus on ensuring that the Canadian economy is as competitive and resilient and strong as it possibly can be. And that means getting our own domestic policy as good as it can possibly be — improvements in internal trade, taxes, regulations, competition policy, all the topics we’re exploring in the Productivity Initiative.
SF: One of the reasons the Trump administration has given for imposing tariffs is to bring manufacturing jobs back to the U.S. Are there other, better ways of achieving this objective that would not involve tariffs?
TT: The previous [Biden] administration approached this in the form of subsidies … with their subsidies to chip manufacturing … with subsidies to battery production facilities, which Canada also adopted. So there is the subsidy route.
You can use carrots or sticks. But if your goal is to try and increase manufacturing in the United States, those are two options that you have.
You could also approach it through regulatory changes that make it easier to invest and scale up facilities in the United States. That does seem to be something that the administration in the U.S. is trying as well, although it takes a lot longer to see any effect from that.
SF: Canadian policymakers across party lines have expressed a willingness to implement multi-billion-dollar corporate aid programs to offset the harm caused by tariffs. Is this sort of intervention viable and desirable?
TT: I think it depends on how they’re structured.
When we retaliated on the steel and aluminum tariffs the last time around, we were levying tariffs on the import of steel and aluminum. We then provided the revenue that generated to firms that were paying tariffs on steel and aluminum to the United States.
So it could be structured in an interesting way to try and offset the cost of tariffs for those large facilities.
The devil will be in how they’re designed. Those details do matter. And we just don’t know at the moment how those programs may — or even if they will — be rolled out.
SF: To what extent are Canada’s interprovincial trade barriers primarily regulatory as opposed to practical, such as ensuring physical infrastructure is compatible, for example?
TT: Internal trade costs are almost entirely due to differences in rules and regulations and standards and certifications and credentials from one province to the next …
Sometimes they’re physical if the regulations require a certain design of the item in question. There are, for example, bottle size restrictions on certain types of beverages that vary from one jurisdiction to another.
You shouldn’t think about it as something fundamental to the Canadian economy, but rather something that is due to the way we write rules differently in one location compared to another. And that makes the challenge of overcoming them hopefully clear.
It would take a long time to go through every single regulation one-by-one and try to harmonize nationally. That’s kind of what we’re trying to do right now, and it’s slow, but useful.
Another alternative is what Nova Scotia proposed last week. It is unilaterally recognizing as valid for Nova Scotia any rule or regulation in some other jurisdiction. Now in their case, they made it contingent on the other jurisdiction doing the same for Nova Scotia, so we’ll see where it goes from here.
SF: Some politicians have argued Canada needs to enhance trade relations with countries other than the U.S. Canada already has trade agreements with the EU, and we’re working on one with the U.K. How significant are the opportunities to diversify trade relations?
TT: I think that the ability for us to expand trade with other countries through trade agreements is largely over.
We have trade agreements with a lot of countries. And [with] all of the major economies where we could realistically have an agreement, we have one. India and China, for geopolitical reasons, are unlikely to be in the cards anytime soon. The Trans-Pacific Partnership allows other countries to join, and many other Asian countries that are not currently members are looking at joining, and Canada should support that, for sure.
Our limitation is not one about policy; it’s about infrastructure, and our physical ability to trade with other countries outside the United States. We need bigger ports and more rail capacity. And before that, trade diversification is not in the cards.
SF: Geography is a very stubborn fact.
TT: And that just takes infrastructure to overcome.
