A collective sigh of relief
THE CANADIAN PRESS
Donald Trump’s inauguration on Monday brought a collective sigh of relief in Canada, which avoided the immediate threat of a trade war with the U.S. - a conflict that could have plunged our economy into recession while stoking fresh inflationary pressures.
Instead of imposing tariffs, according to reports, Trump is calling on U.S. federal agencies to closely examine trade practices, specifically singling out Canada, Mexico, and China.
For Canada, this represents the best-case scenario in the face of Trump’s earlier threats of sweeping tariffs.
First, it buys our economy some time to recover from its recent slump, as the effects of lower borrowing costs begin to kick in. Bank of Canada survey data released Monday underscored how the macroeconomic environment is starting to positively influence business and consumer confidence. While sentiment remains “subdued,” businesses are increasingly optimistic about their sales potential and investment outlook. Consumers, too, are reporting improved financial health and sentiment.
This recovery is poised to gain momentum as the Bank of Canada continues its rate-cutting trajectory, with another reduction likely next week.
Second, it gives policymakers an opportunity to craft a coherent strategy to address Trump’s trade concerns and avoid a damaging trade war. The Canadian government has signaled its readiness to retaliate against any U.S. tariffs with countermeasures designed to inflict pain on the American economy. While this posture may make sense in theory, it is unlikely to be credible in practice.
As David Rosenberg pointed out in a Bloomberg News interview, Canada relies on exports to the U.S. for 20% of its GDP, while exports to Canada account for a mere 1.2% of U.S. GDP. In such an uneven fight, retaliatory tariffs would likely hurt Canada more than they would harm the U.S. To prevail in this scenario, Canada would need extraordinary national resolve—a level of unity that is far from guaranteed.
Trump’s fundamental economic goal is to shift consumption toward U.S.-produced goods and services. For Canada, the challenge is clear: we must develop a strategy to align with this objective while protecting our economic interests.
