Seemingly overnight, the biggest question facing Canada’s economy has become: what happens if North American free trade comes to an end?
Driving the news: While the federal government is scrambling to head off the threat of U.S. tariffs, newly released modelling shows just how much damage tariffs could do to the Canadian economy.
Why it matters: If Trump is serious about tariffs, the outcomes for Canada range from bad to catastrophic, the model shows.
- In a scenario in which Canada doesn’t retaliate with tariffs of its own, the economy would shrink by 3.8% (more than twice as big a contraction as in the first year of COVID), the loonie would fall 20% against the U.S. dollar, and unemployment would rise by a third, according to Scotiabank’s models.
- If Canada does retaliate dollar-for-dollar with tariffs on U.S. imports, that model shows our economy contracting by 5.6%. The loonie will fall by ~20%, unemployment will rise by 3 percentage points, and inflation will increase by 4 percentage points, forcing the Bank of Canada to raise interest rates by 280 basis points.
Yes, but: Tariffs would also shrink the U.S. economy and increase both unemployment and inflation south of the border — albeit to a much less painful degree.
Bottom line: The end of free trade with the U.S. would put Canada in a bind. Retaliating against the U.S. would make tariffs more painful for the Americans but at the cost of damaging our own economy even more.—TS