Donald Trump is holding a big stick over Prime Minister Justin Trudeau in pending trade negotiations because retaliating against any new tariffs would do even more damage to Canada’s economy, a new study shows.
After a protectionist campaign, the new U.S. president said he intends to act fast on renegotiating the North American Free Trade Agreement. On his first full day in office he promised to impose a “very major” border tax on companies that move jobs outside the country. If he does, Trudeau’s best response would be no response, according to the C.D. Howe Institute.
The Toronto-based think tank released a paper Wednesday that simulated the impacts of a tariff and the costs of retaliation. A 10 percent tariff on all U.S. imports would be “a serious hit” for Canada. A countermeasure would be even worse, doubling the damage without having much effect on the American economy.
“Canada should avoid any temptation to retaliate,” author Dan Ciuriak wrote in the report. Countermeasures wouldn’t “generate enough leverage on U.S. interests to generate an exemption from the U.S. tax,” the former economist at the federal trade department said by phone from Ottawa.
In the study, Ciuriak found Canada’s exports of goods and services would fall by $35.7 billion, and with retaliation, that figure balloons to $50.2 billion. The country’s gross domestic product would shrink 0.9 percent from a U.S. tariff, and 2 percent under a retaliation scenario.
And for Trump? American GDP would contract 0.8 percent, and about 1 percent if Canada hit back.
Ciuriak’s report comes a week after Wilbur Ross, Trump’s nominee for commerce secretary, said the U.S. would begin any Nafta talks from a position of strength.
“When you start out with the adverse party understanding that he or she is going to have to make concessions, that’s a pretty good background for any negotiation to begin,” Ross said during his confirmation hearings.
Trudeau has stuck to a positive message on U.S. trade since Trump’s election, saying he’s open to reworking Nafta and pointing out that 35 U.S. states list Canada as their top export market. That tone has mostly worked so far. Trump adviser Stephen Schwarzman of Blackstone Group LP flew to Calgary this week to reassure Trudeau during a cabinet retreat that Canada isn’t a primary target.