Liberation Day Looms
Tariffs and an election campaign on edge
An employee works on the production line at the Martinrea auto parts manufacturing plant, in Woodbridge, Ont. The site supplies auto parts to both Canadian and U.S. auto plants. THE CANADIAN PRESS/Chris Young
With so much happening, it’s tough to know where to start. So let’s start with the money.
Here was the lede in the Associated Press market wrap late yesterday:
“Another wipeout walloped Wall Street Friday. Worries are building about a potentially toxic mix of worsening inflation and a U.S. economy slowing because of households afraid to spend due to the global trade war.”
Just yesterday, the S&P 500 fell 2%. The Nasdaq 100 was down 2.6%. The Dow Jones Industrial Average fell 1.7%. Canada’s benchmark stock index was down 1.6%.
The U.S. stock market is on pace for its worst quarter since 2022 and it’s not difficult to find the culprit. Investors have clearly grown tired of Donald Trump’s plans to reengineer the global trading system — especially the disorderly way he’s going about it.
Markets are now eyeing a new wave of tariffs on April 2 – what Trump has dubbed “Liberation Day” for America – that will target what the administration says are unfair trading practices by other countries. These are the so-called reciprocal tariffs.
That’s on top of new 25% tariffs on car imports into the U.S., announced Wednesday, and the 25% tariffs on steel and aluminum that came into effect earlier this month.
For Canada, we’re still awaiting final decisions on the existing tariffs: a 25% tariff on most goods (10% on energy), imposed March 4 but deferred for one month.
Here’s another kind of market.
In the week since the election campaign began, prediction platform Polymarket has moved from pricing even odds for either Mark Carney or Pierre Poilievre to win the election, to about 64-37 in favour of the Liberal leader. That’s in line with recent polling, which consistently puts the governing Liberals in the lead.
The first week of the campaign has seen the emergence of three major threads:
The Trump effect — the U.S. president’s threats have flipped this campaign on its head.
The Liberal resurrection — a new leader and a rising nationalism have revitalized the party.
The collapse of the NDP vote — turning the election into a two-party race.
In all three cases, the Liberals have the advantage — and have every political incentive to keep the fight with Trump going over the next four weeks before election day on April 28.
That raises the question of what should be taken at face value, and what should be played down? Which Canadian actions are credible enough to shape Trump’s strategy toward Canada? And which are not?
Not Credible
Eurasia Group’s Ian Bremmer hinted at some of these credibility questions in a controversial analysis released Wednesday on how Trump’s trade moves are affecting allies.
While relations with the EU are “fundamentally damaged,” Bremmer writes that Canada and Mexico are more likely to bend.
“They have no credible strategy to push back. Everyone understands they’ll have to accept Trump’s terms eventually; the only question is whether capitulation comes before or after a costly fight.”
Emphasis on “everyone understands.”
Carney has wavered a bit on how costly a fight he’s willing to have. Last week, he called it unviable to go toe-to-toe with Trump on tariffs. But on Thursday, after Trump announced the auto duties, Carney came out swinging with a defiant speech that included this brazen line:
“The old relationship we had with the U.S. based on deepening integration of our economies and tight security and military co-operation is over.”
That’s rhetoric dialed to 11.
One day later, after a call with Trump, the two countries agreed to start negotiations after the election on a “new economic and security relationship,” according to Carney’s announcement. Again, note the language about how the “old relationship” is over, and a “new” one will be built.
This sounds like progress, though no one really knows. We’ll find out what Liberation Day looks like for Americans on Wednesday.
Tariffs and Incentives
Which brings us to retaliatory tariffs. If Trump doubles down on tariffs next week, all Canadian political parties will need to chart more explicitly some type of position on retaliation.
One concern: there are not only political incentives to stoke a fight with the U.S., but fiscal ones too.
Should parties start baking tariff revenue into their platforms, it will become much harder to walk them back – regardless of economic damage. I wrote about this in The Hub on Friday, ending with this warning:
“The danger is that a sizable chunk of campaign spending ends up riding on a volatile, unpredictable source of cash—one that depends entirely on the decisions of a foreign leader."
Canada already has retaliatory tariffs in place on about $60 billion worth of U.S. goods – steel, aluminum, consumer products. The Liberals have promised another $95 billion if the current tariffs remain. Those tariffs alone could raise anywhere between $15 billion and $30 billion a year in additional revenue.
And the campaign promises so far have been pricey. Carney’s campaign has already pledged:
An income tax cut worth $6 billion
A $5 billion fund for trade diversification
A $2 billion fund for the auto sector
A military pay increase (likely in the hundreds of millions)
That’s in addition to another round of carbon rebates, despite having cut the revenue source for those transfers – at a cost of around $4 billion, per the Globe and Mail.
Poilievre, meanwhile, has promised:
Lower personal income tax rates, costing about $14 billion annually
Expanded eligibility for tax-free savings
Elimination of taxes on low-income working seniors
Removal of GST on new homes (shared by both parties, though the Liberal plan is more limited)
Both leaders have also supported the reversal of the capital gains tax hike—estimated to cost $20 billion over five years, half of it in the first two years.
Quick back-of-the-envelope math puts both parties in the $20 to $25 billion per year range worth of measures (all in) — and we’re not even through the first week of the campaign.
According to the Parliamentary Budget Officer’s latest projection, before campaign promises, the country was already on track for a $50 billion deficit this fiscal year and $47 billion next year.
And that’s assuming no major economic deterioration. The PBO is forecasting a relatively robust 1.7% GDP growth in 2025 and 1.5% in 2026—about twice the pace recently forecast by the OECD.
If you use the OECD’s more cautious outlook, you’re looking at another $5 billion hole in this year’s budget, and $10 billion next year.
All while both parties are promising to keep deficit spending in check.
