What impact will the U.S. election have on the Canadian economy?

Ahead of Tuesday’s U.S. presidential election, one economist says a Donald Trump victory could present downside risks to the Canadian economy, while a Kamala Harris administration would likely be a continuation of the status quo.

 

Marc Ercolao, an economist with TD Economics, projected the impact of Trump’s proposed tariff policy on the Canadian economy in a report last month. Assuming broad retaliatory efforts by Canada, he noted the proposed 10 per cent across-the-board tariff could hit the economy “hard,” causing real gross domestic product (GDP) to fall 2.4 percentage points over two years compared to baseline projections.

 

In an interview with BNNBloomberg.ca, Ercolao said the outcome of the election could cause some “friction” in trade relations between Canada and the U.S., but noted in the report he thinks “cooler minds will prevail” ahead of negotiations scheduled to occur in 2026.

 

“So, as we know, Trump is threatening or promising to levy a 10 per cent tariff on Canadian imports. Now that could be as high as 20 per cent that we’ve heard in some of his talks, but even on the assumption of 10 per cent, that is very impactful, and then there’s knock on effects from there,” Ercolao said.

 

When assessing the potential impact of a blanket tariff on Canadian goods, he noted a few assumptions were made in the report.

Firstly, that Trump sticks to the original plan of a 10 per cent tariff on Canadian exports, despite floating a 20 per cent levy. As well, he assumes Canada does not receive an exemption and retaliates on U.S. imports into Canada. Additionally, the report assumes tariffs would be phased in at the beginning of 2025 and eliminated by 2027 after the United States-Mexico-Canada Agreement (USMCA) pact is extended.

 

Despite the potential hit to real GDP outlined in the report, Ercolao said he doesn’t expect the potential Trump tariff policy to cause a recession in Canada, “but we do see a stagnation of growth and that’s because Canada is an export engine to the U.S.”

 

“We export over 75 per cent of our goods to the U.S. By implementing an across-the-board tariff, you lose presumably a lot of that export activity over the next couple of years. Should that plan be (put) in place, losing that export activity translates directly into a pretty big real GDP hit,” he said.

 

Trade linkages between Canada, the U.S. and Mexico are vital, according to the report, with exports between the three countries topping $1.5 billion as of last year, representing a 30 per cent increase compared to 2019.

 

Late last month, Bloomberg News reported that Derek Holt, Bank of Nova Scotia’s head of capital markets economics, wrote a note to investors saying that a Trump presidency would bring about extreme protectionism.

Retaliation

If blanket tariffs are enacted, the report says Canada’s retaliation would likely be “targeted and strategic” instead of a one-for-one retaliation.

 

“So, if Canada goes ahead and implements a 10 per cent tariff across all U.S. goods exports, now that’s a worst-case scenario that we don’t think will happen, but in that case, we would see a bit of a temporary inflation bump in Canada due to higher imported prices,” Ercolao said.

 

Trump’s previous presidency, Ercolao said, provides a historical example of how the tariffs and retaliation could play out. The report said events could follow closely to 2018, when Canada released a list of consumer goods that would face a 10 per cent tariff, coupled with tariffs on steel and aluminum.

 

“From whiskies to orange juice and lawn mowers to maple syrup, goods categories were carefully selected to inflict pain on Republican and swing states while protecting Canadian producers and consumers,” the report said.

 

“Canada would likely first opt for a resolution to carve out an exemption from tariffs altogether, but a more strategic retaliation approach in the absent of this outcome will be top of mind.”

USMCA

Ercolao noted that the USMCA agreement was “birthed by Donald Trump” during his last presidency.

 

 

“Ultimately, we think that the trade channel with the United States and with Mexico via renegotiating successfully the USMCA agreement, we think that will be the ultimate outcome,” he said.

 

In the report he said he is “optimistic” that Canada will avoid blanket tariffs.

 

“The likelihood that tariffs drag down the U.S. economy, disrupt supply chains, and stoke inflation are enough of a reason to forgo tariffs on Canada,” the repot said.

 

“Ultimately, Trump’s best and most likely use of tariffs are as a bargaining chip to force Canada into concessions come the USMCA renegotiations in 2026.”

Harris win?

Despite the potential economic downsides of a Trump victory, Ercolao said a Harris victory would be unlikely to have a material impact on the Canadian economy in his baseline view.

 

“As far as trade goes, we think that trade policy will be status quo and will continue as is. It is worth noting that Senator Harris, she was one of the ones who was actually opposed to signing onto the USMCA,” he said.

 

“So, we still think that even under a Harris presidency, that there will be a little bit of friction in that negotiation for renewal, we just think that it will be a little bit easier path to a peaceful negotiation.”

 

 

 

 

This article was first reported by BNN Bloomberg