Key Takeaways:
– Experts warn of a possible recession if a tariff war ensues between the U.S., Canada, and Mexico.
– Canadian officials are considering retaliatory levies following Trump’s announcement of 25% tariffs on all goods from Canada and Mexico.
– US consumers could experience rising prices on various goods, with gas prices expected to increase sharply.
– Both Canada and the U.S. risk significant economic impact with inflation and unemployment levels expected to rise.
– The North American energy sector and auto supply chains would be heavily affected by these tariffs.
Potential Recession Risk
Economic experts have raised concerns that the prospect of tariffs between the U.S., Canada, and Mexico could not only disrupt commerce between the countries but also potentially tip all three nations into a recession. Following President-elect Donald Trump’s threat to impose a 25% tariff on all goods from Canada and Mexico, Canadian officials have revealed that they are considering retaliatory measures.
Expected Inflation and Unemployment Spike
With the potential implementation of a blanket 25% tariff on Canadian goods, economist Michael Davenport of Oxford Economics predicts that Canada could face a recession as early as 2025, spurred by a significant increase in inflation. Unemployment in the country could also rise, approaching 8% by year-end. Industries most at risk include the auto, energy, and heavy manufacturing sectors that heavily rely on U.S. exports and components.
A Retaliatory Game of Tariffs
Previously, Canada imposed its own duties on U.S. products, including whiskey and yogurt, during Trump’s first term. This was in response to Trump’s tariffs on Canada’s steel and aluminum exports to the U.S. Now, Mexico’s President, Claudia Sheinbaum, has also hinted at imposing tariffs on American products in retaliation to Trump’s proposed duties, a move aimed at curbing undocumented immigrants and illicit drugs flow.
US Consumers to Shoulder the Burden
Whilst Trump and his team continue to advocate that the tariffs introduced during his first term did not boost US inflation and achieved economic objectives, the threat of a full-scale trade war could result in a shallow recession for the U.S. too. If Canada were to impose across-the-board tariffs on American goods, the political relationship between the two allies could become strained. Notably, as Canada supplies approximately 20% of oil to the U.S., gas prices could see a sharp increase, potentially rising 30 to 70 cents per gallon.
Impact on Energy and Auto Sectors
Despite the brewing tensions, some analysts believe the incoming administration is more likely to impose limited tariffs on certain Canadian products such as steel, lumber, and dairy. Davenport, among others, thinks it is unlikely that the new administration will impose tariffs on Canadian auto and energy exports – domains that constitute about 40% of total Canadian exports to the U.S. Introducing tariffs on these goods could deliver a significant blow to the highly integrated North American energy sector and auto supply chains, resulting in substantial negative effects on the U.S. economy as well.
In conclusion, a trade war sparked by tariffs could have grave economic implications for all involved. Therefore, diligent monitoring and thoughtful decision-making are vital in the days leading to the inauguration to prevent potential economic downturns in the U.S. and its key trading partners.