The Impact of the Trump Effect on the Canadian Economy

For decades, mature economies like the US and Canada have continued to thrive on existing economies of scale where favorable factors of production ensure that these countries experience a competitive advantage in the trade of some products (Bédard, 2016). In the past, the US has been keen on free market economics on a global scale until recently when Donald Trump was elected as America’s 45^th President. President Trump voiced his administration’s agenda as one that would seek to make America great again. At the backbone of Trump’s election slogan was a regression back to protectionism which contravenes principles of free trade (Hadfield & Potter, 2017). Free trade agreements such as NAFTA of which Canada is a signatory member are at present bulking under the Trump effect (Georges, 2017). Through policy frameworks, the new American administration seeks to increase tariffs and taxes on products produced in NAFTA member states as well as lowering corporate tax for huge American business. This paper delves into the impacts a protectionist American economy under the Trump administration which aims to benefit American companies at the expense of Canadian entrepreneurs.

Trade with Canada

Canada is a country with vast and diverse natural resources making it a source country for many products consumed within the expansive American economy. In essence, Canada remains one of the U.S. most important trading partners but the effects of drastic changes in the latter’s trade policy are bound to negatively impact on the Canadian economy (Georges, 2017). In 2016, Canada suffered a poorer than expected economic environment due to uncharacteristically low crude oil prices since it is a major oil producer. It also suffered huge forest fires which not only affected its forests but also land on which it extracts crude oil. This was all in the wake of a new American leader who strongly intimated his desire to place American entrepreneurs at a better position by erecting protectionist barriers to trade.

Major Canadian exports to the U.S include soft lumber for the construction and real estate industries; crude oil and gas; aluminum and steel; aircrafts; and dairy products (Gereffi, 2017). Trumps trade policies with Canada look to significantly impact on the trade of the four export products in an effort to favor American manufacturers. Collectively, such actions are set to present the Canadian economy with significant threats. It is important to appreciate that the U.S. market absorbs in about 70% of Canadian exports. Canada has always strongly fought off hard towards protecting its trade interests with its neighbor to the south to the extent that the two trading partners always settled for a compromise viable to both of them (Tapp, Van Assche, & Wolfe, 2017). However, in April 2017, the US imposed 24% more in duties on Canadian soft lumber imports to the US (Coppola, 2017). It is envisaged that trade disputes are bound to gain prominence in the course of Trump’s presidency to which effect the Canadians to retaliate against a now hostile trading partner.

Purchasing power in the Canadian Economy

It is evident that Canada is bound to continue suffering greater import tariffs on its products to the U.S. such as is the present case with soft lumber. According to Coppola (2017) Canada may be subjected to contending with these tariff levels rather than result in a far more damaging trade war. The overall effect of Trump policies on Canadian purchasing power within its domestic economy are believed to be minimal in the long term. For instance, economists point out that lumber exports to the US essentially represent a fraction of total trade volumes between the two trading partners (Bédard, 2016). On the same note, a rise or growth in America’s domestic economy inadvertently improves the purchasing power of the Canadian people as Americans are bound to purchase more of the broad-based Canadian imports. However, a region such as Ottawa which dependent on the lumber industry is set to experience turbulent economic times as mills suffer closure and jobs are lost. To mitigate future adverse U.S. policies, Canada is looking to venture into new markets such as China to ensure its lumber industry continues to thrive in the foreseeable future (Gereffi, 2017).

The Canadian currency is also reported to have suffered a significant drop relative to the US dollar as a result of the fresh lumber tariffs. An adverse effect associated with a depreciated currency is that the Bank of Canada may have its freedom to fashion the country’s monetary policy based on local economic conditions eroded (Hadfield & Potter, 2017). An interesting outcome of such currency variations between two trade partners is that a weaker Canadian currency to the American dollar will inadvertently make imports from Canada cheaper in comparison to US products. In the longer term, the consequences of the Trump effect are expected to be profound leading to situations where some Canadian’s crossover to the US in search of jobs.

Impact of Import Tax by Trump’s Administration on Canadian Exports

Canadian exports to the U.S. are bound to prove uncompetitive forcing consumers to seek more affordable alternatives. The import tax imposed on soft lumber will adversely impact the American residential construction and repairs sector leading to a decreased demand of the product. As Copolla provides, the new tax is bound to push up the pricing of fresh homes by almost 1,300 dollars (2017). The lumber industry provides incomes for numerous communities in Canada with at least 20% of these gaining directly. Higher priced inputs will imply a slowing homes constructions industry in the US which employs a far greater workforce than the Canadian lumber sector.

Conclusion

Protectionist policies always end up harming the countries dependent on them. America has always thrived on innovation on various societal fronts to ensure competitive advantage in a globalized environment. Trump’s trade policies seek to protect American industries in a way that will not result in the desired outcomes. Canada has the options of broadening its export market with other countries in a situation which may leave the US isolated in the global economy. Making a few major products expensive for the American people will have an effect of depreciating the Canadian currency against the dollar which will make Canada’s other exports cheaper that those produced by American companies. Trump effect on the Canadian economy is akin to shooting America’s economy on the foot given that they are very important for each other’s prosperity

References

Bédard, M. (2016). NAFTA: Donald Trump’s criticisms are unfounded. NAFTA. http://www.iedm.org/files/lepoint1016_en.pdf

Coppola, F. (2017). President Trump’s tariff on Canadian softwood lumber imports will hurt America most. Forbes. Retrieved from https://www.forbes.com/sites/francescoppola/2017/04/25/president-trumps-tariff-on-canadian-softwood-lumber-imports-will-hurt-america-most/#7bb04c212232

Georges, P. (2017). Canada’s trade policy options under Donald Trump: NAFTA’s rules of origin, Canada-US security perimeter, and Canada’s geographical trade diversification opportunities (No. 1707E). Retrieved from https://socialsciences.uottawa.ca/economics/sites/socialsciences.uottawa.ca.economics/files/1707e.pdf

Gereffi, G. (2017). Trump’s protectionism and its impact on global value chains. Retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&ved=0ahUKEwjh-OTKnJvVAhUF8RQKHaLdAf4QFgg1MAM&url=https%3A%2F%2Fdukespace.lib.duke.edu%2Fdspace%2Fbitstream%2Fhandle%2F10161%2F14014%2F2017-04-05_Gereffi_Global%2520Supply%2520Chain_Interview%2520Transcript_Asia%2520Experts%2520Forum.docx%3Fsequence%3D1&usg=AFQjCNHZhPH1xkJkpSgOkbnRJqKKYas3Fg

Hadfield, A., & Potter, R. (2017). Trump, Trudeau and NAFTA 2.0: Tweak or Transformation? The Round Table, 106(2), 213-215.

Tapp, S., Van Assche, A., & Wolfe, R. (2017). A road map for more inclusive Canadian trade policy (conclusion). Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2985485

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