Should U.S. President Donald Trump make good on his promise to apply a 25% tariff on Canadian goods, Ottawa should hit back with retaliatory tariffs on symbolic goods like Kentucky bourbon and Tennessee whiskey.
Speaking at a Global Risk Institute online event Thursday, Trevor Tombe, an economics professor at the University of Calgary, said that would minimize negative impacts on the Canadian economy and serve as a public relations measure.
“To retaliate broadly is merely to tax Canadians and to disrupt our own ability to produce,” Tombe said.
A full retaliation would shrink the Canadian economy by 2.5%, according to Tombe’s calculations, whereas more measured steps could limit the contraction to under 2%.
“Your typical recession is on the order of about a 3% reduction in GDP. So, this kind of a trade war would be a recession-inducing event,” Tombe said.
The lion’s share of federal revenue comes from corporate and income taxes. Thus, an economic contraction would shave about $15 billion of revenue off the federal budget, he said.
Nonetheless, the government could earn about $80 billion in tariff revenue if it retaliates. “Tariff revenues can be distributed both to individuals, businesses and provincial governments to help cushion the blow from the economic disruptions,” Tombe said.
Despite the revenue potential, retaliatory tariffs would hit harder here than in the U.S. Trade between the two countries represents about one-third of economic activity here, and only 3% of economic activity in the U.S.
“[Trade] disruptions have a more direct effect on Canada’s economy than the United States,” he said.
In addition, the 2.4 million Canadian jobs exposed to U.S. tariffs could face reductions in hours, lower wage growth and job losses, Tombe said. Provincial economies supported by exports to the U.S. such as motor vehicles from Ontario and fossil fuels from Alberta could see increased unemployment from reduced demand for Canadian goods.