There are better ways to fight back than a full-on trade war

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I actually had a subscriber in the United States admonish me last week and call Canadians a bunch of crybabies and parasites.

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Let me be clear.

The grand total of fentanyl that crosses the Canadian border into the U.S. is a one per cent share. Meanwhile, 90 per cent of the illegal firearms that enter Canada come from the U.S. I doubt that last number comes as a surprise to many since a Canadian can’t run out to the local hardware store and buy a Glock.

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More to the point, globalization has hurt Canada way more than it has impacted the U.S. Manufacturing employment in Canada is lower today than it was in March 1977 (yes, that is the case), and factory output is below the level in June 1999. Canada’s industrial base has been totally gutted over the decades (not crying, just reporting the facts).

The reason why the U.S. has such a big trade deficit is because it is an economy built on consumerism. It is virtually the only major country in the world without a federal sales tax of some sort, and one of the few countries with a single-digit gross personal savings rate — eight per cent compared to 12 per cent in Canada.

Of course, the U.S. would have a big trade deficit for another reason: gargantuan fiscal stimulus, which has taken the deficit-to-gross domestic product ratio to double the Organization for Economic Co-operation and Development average of three per cent. Tack on the fact that Canada’s net effective tariff rate is 1.8 per cent, which is lower than the comparable 2.7 per cent rate south of the border. Not to mention that virtually all of the trade gap between the two countries is concentrated in the resource sector — basic materials (including cheap energy) that American businesses and households rely on.

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This is all to say that there is nothing beautiful about tariffs and it is a very inefficient way to bolster a country’s industrial base. They also risk disrupting North American supply chains. All Donald Trump’s trade policy here is going to do is create headaches for everyone. It is likely to backfire.

Here’s why. First, I do not agree that Canada should engage in a tit-for-tat trade war with a country that takes in 20 per cent of Canadian GDP at the same time that the U.S. ships only one per cent of its output into the tundra. Trump will only hit back again. Fight the bully in the schoolyard and you end up with two black eyes instead of one. I’d rather still have one good eye.

Life isn’t fair, neither is this issue, so there really is nothing to be gained by crying about it or biting the hand that actually does feed you. Hitting back with tariffs, export taxes or energy shipment blockages will only deepen the recession that is inevitable with the 25 per cent blanket tariff that Trump is advertising.

Let nature take its course. The Bank of Canada will be slashing rates, quite appropriately, with the U.S. Federal Reserve on hold (Trump will find out, as he did in 2018, that he does not control U.S. monetary policy). The Canadian dollar will likely end up weakening to 62-63 cents U.S. with this shock, and that, in turn, will spur a boom in U.S. tourism and travel flows into Canada.

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The hotel and airline industry here will be in boom mode. Americans will see that 40-plus per cent discount on what the U.S. dollar provides them north of the border go to 60 per cent, and what Trump can expect is a flood of people visiting Canada and extending their visits with this nearly unprecedented bargain. And because the president definitely has no control over Canadian monetary policy, there is nothing he can do about it. And he can’t put a tariff on tourist and travel activity.

As things stand now, Canada’s bilateral trade balance on travel has ballooned to record levels (imagine where it goes with an even weaker loonie), and the dollar inflow of these tourism (and business) receipts has ballooned nearly 50 per cent over the past year.

In November alone, more than two million U.S. residents visited Canada by land, air, or rail — 14 per cent more than a year ago and back to pre-pandemic peaks. The number of Canadians heading south has been virtually flat over the past 12 months and is currently 15 per cent below the pre-COVID-19 level. This is why the currency is important and why it is that the currency is the best weapon Canada has in its arsenal.

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Trump slaps on a 25 per cent tariff and the next thing you know, the hotels in Whistler, B.C., Toronto, Quebec City and Niagara Falls, Ont., will be filled to the brim. And maybe, just maybe, the 3.5 million Canadian snowbirds that leave the brutal weather here for sunny Florida (though not right now) should reconsider where they want to spend the winter. That would be pretty effective retaliation.

I am not sure people know that these snowbirds contribute as much as US$10 billion to GDP and support 1.6 million jobs in the Sunshine State. It wouldn’t be a terrible idea for Governor Ron DeSantis to pay a visit to Mar-a-Lago or at least lob in a call to his good buddy.

Of course, a big hit to the Canadian dollar would cause food import prices to soar and we must keep in mind that Canadians import more than 70 per cent of their annual consumption of food. What I would recommend to Ottawa, which it does have the fiscal capacity to do, would be to cushion the blow with food-related tax rebates for low- and middle-income Canadians.

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In conclusion, Trump’s tariffs on Canada will carry with them the classic law of unintended consequences and nothing good is going to come out of it, and there are better ways for Canadian policymakers to respond than engaging in a tit-for-tat trade war, which will only aggravate the likely deep recession (rivalling the economic contraction in 1991 and not far off the real GDP decline in 1982).

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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