Tariffs
What they are and what they mean to us
If you follow current politics, you will know tariffs are a favorite talking point for incoming US president Donald Trump. In case the threat becomes reality, let’s understand this a bit better and see how they may affect us.
What is a tariff?
Let’s assume the US imposes a 10% tariff on Canada. That means:
· The US government immediately receives an income of 10% for everything Canada sells to the US. An alternative to raising taxes
· The US citizen pays up to 10% more for Canadian goods, immediately or within a few months. This is inflation via oil, cars, car parts, potash, aluminum, some foods, etc. (1)
· The US economy will shift more purchases to other countries, over time measured in months or years
· US companies may begin to produce goods that were previously imported, increasing US employment over years
· Canadian companies lose sales and react by lowering profits and/or selling more to other countries and/or laying off Canadian employees over an indeterminate time
Typically, a US tariff will be responded to by a Canadian counter-tariff:
· The Canadian government immediately receives an income
· The Canadian citizen pays more for US goods, immediately or within a few months.
This is inflation via cars, car parts, oil, tractors, machines for industry, some foods, etc. (1)
· The Canadian economy will shift more purchases to other countries, over time measured in months or years
· Canadian companies may begin to produce goods that were previously imported, increasing US employment over years
· US companies lose sales and react by lowering profits and/or selling more to other countries and/or laying off US employees over an indeterminate time
The governments are initially better off, but at the expense of their citizens and companies. In time, the government also becomes worse off as inflation, unemployment and lower incomes reduce their tax receipts in an economic recession. A stock market downturn could also be expected.
Types of Tariffs and Their History
There are two main types of tariffs. Targeted tariffs are applied to a few specific items and are much more common. Blanket tariffs are applied to a broad range of commodities and goods and are uncommon.
Targeted tariffs from recent history include the ongoing US softwood lumber tariffs and Trump’s tariffs on steel and aluminum during his first presidency. Even more recent are the new US, Canadian and EU tariffs on Chinese electric vehicles.
What about blanket tariffs? Is there a historical reference relevant for this type of strategy? Yes, according to a recent Paul Wells podcast (2).
In 1930, the US President Hoover imposed the Smoot-Hawley Tariff Act, despite widespread opposition from economists. Existing tariffs increased by about 20%. Then new US tariffs were applied like a blanket to 25 countries including Canada. The trade war was on. WLM King and the Canadian government responded with counter-tariffs on US products. By the following year, RB Bennett replaced King as Prime Minister and Canada pushed through further tariff items and increases to counteract the growing US tariff blanket.
Sanity began to prevail when FD Roosevelt defeated Hoover in 1932, as he began working to reduce tariffs and succeeded with a new Trade Agreements Act in 1934. Canada followed suit and the four-year trade war with the US ended.
There is consensus among economists that the 1930s tariff war made the Great Depression worse than it needed to be in Canada and in the US. How much worse has never been determined. (3)(4)
Is this History Rhyming?
It looks that way. The last blanket tariff and trade war between the US and Canada occurred in the same era as the last Fourth Turning and Debt Cycle bottom.
What does this mean for us?
Any form of trade war - such as tariffs - makes the risks of this cycle bottom more certain and more imminent. Review and adjust your debt, savings and investment positions to Be Prepared.
PS. What if the tariff threat is just a bargaining tactic? Maybe Canada avoids tariffs by securing our shared border and/or increasing defense spending for NATO. The increased Canadian government deficits and debt to accomplish this – in the $10’s of billions per year – could be just as financially painful as a trade war.
PPS. This is an unusually long blog. I just couldn’t squeeze it down anymore.
1. https://oec.world/en/profile/bilateral-country/can/partner/usa
2. North America faces the Trump tariff, Paul Wells, Substack, November 27, 2024
3. https://www.fraserinstitute.org/commentary/history-clear-high-tariffs-and-trade-wars-devastate-countries
4. https://macleans.ca/facebook-instant-articles/what-we-can-learn-from-a-disastrous-1930-u-s-tariff-on-canadian-goods/