Tariffs 101: Economist explains economic impact with Evan Bray

As Canada braces for the impact of U.S. tariffs, University of Regina economics professor Jason Childs breaks down what it means for Canadians. From higher prices on imports to reduced household incomes due to lower export revenues, the ripple effects could be significant. Childs explains why the tariffs could lead to job losses, a weaker dollar, and why counter-tariffs might not provide the relief some expect.

Listen to the March 4 interview with Jason Childs:

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JASON CHILDS: The US tariffs are going to affect us, mostly on the production side. So every time we try and sell something in the States, there’s going to be a 25 per cent tax. It’s going to operate just like a GST or a PST, but it’s that troll under the bridge that you got to pay every time you cross. So anytime we ship anything, oil, potash, car parts, anything goes into the US, an extra 25 per cent is added on.

EVAN BRAY: My understanding is there’s a couple of implications for Canadian producers. One, they could be asked to absorb some of the cost in what they sell their products for. And then the other side is they could stop shopping with us altogether. Are those the two immediate possibilities for production?

CHILDS: There is a third one as well. And we’re seeing it already today, is a drop in the exchange rate. So as the Canadian dollar becomes less valuable, our goods become cheaper to American buyers, and that offset some of the tariffs.

BRAY: We know to help the dollar, we need good prices for our products. We need to export more of them. So could we work to increase exports to other markets, other than the U.S.? And would it help our dollar as compared to the U.S. dollar?

CHILDS: Probably not compared to the U.S. That’s more of a bilateral question, but it would help us with trade with Mexico, or travelling to Mexico or buying things from Mexico or Europe or somewhere else. So diversifying our trade flows away from us probably isn’t going to help reinflate the dollar, and that’s part of the purpose of this floating exchange rate is to absorb some of that shock and to give us some relief from things like this.

BRAY: What about internal trade? There’s been a lot of talk about reducing internal trade barriers and enhancing internal trade. Does that do anything to the value of our dollar?

CHILDS: It won’t do anything to the value of our dollar externally. It’ll help us get more value for our dollar internally. So it’ll expand our markets for stuff we produce within Canada. And it’ll mean when we go to buy something or do something within Canada and we’re trading with each other, it’ll be cheaper because we don’t have all these trade barriers in the way. So it’ll help on that front, but it won’t help with the value of the dollar.

BRAY: So back to how the U.S. tariffs will affect Canadians. Is this likely to drive up the price of products that we import from the States, because if they’re paying this extra premium on manufacturing products, you’ve got to think they’re passing it along to the consumer, right?

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CHILDS: This is the weird wrinkle about the Canadian-U.S. trade relationship. If we’re talking about cars or other manufactured products, between the start of the product as a raw resource and a finished product as, you know, a good for a consumer, goods can cross the border several times, and if it’s something that’s bouncing back and forth across the border, then yes, some of that cost is going to end up with Canadian consumers.

Bray: Counter tariffs are likely what we’re going to hear this morning. Does that then likely mean a double increase on some products? Hence the push to shop Canadian?

CHILDS: Yep, that’s exactly what it means. And again, because of the relative scale of the two economies, we’re going to end up paying almost all of our counter tariffs, and we’re going to end up paying some of the American tariffs. So we’re going to get hit twice.

BRAY: I think it’s safe to say people understand how tariffs could raise the price of consumer goods. Can you give us a bit more insight into how lower export revenues will reduce household income? And just to extrapolate a little bit, there are a lot of people who think, you know, I’m not in the industry of oil and gas, so how is this going to reduce my household income?

CHILDS: The guys who work in oil and gas or in potash, which is going to be hit as well, those people shop at your stores, they buy your products, they pay taxes, they do all these other things. So when they aren’t spending because they’re unemployed or their hours have been cut back dramatically, that trickle spreads out throughout the economy.

It’s called the multiplier effect. And so when one industry gets hit, the people working in that industry stop spending anywhere near as much, so they don’t go to Tim Hortons, is the example I often use. So now that Tim Hortons sees a reduction in coffee sales and donut sales, they cut back their hours. And now the people working the Tim Hortons, not in the oil and gas industry or not in the potash industry, they’ve seen their household incomes fall because other Canadians aren’t buying as much.

BRAY: Tariffs can be a way to replace other revenue streams. Taxing, for example, and I know that’s something the U.S. President has talked about. Are there any tariffs that could do a significant replacement of taxation in the states?

CHILDS: Not from Canada. I mean, you’d have to go globally for that. And they’re not a huge trader. Imports are nowhere near as big a part of their economy as they are for us. So and the US has a lot of income, and it’s taxed, particularly at the high end, at a relatively high marginal rate. So they generate a lot of revenue from income taxes. I don’t see an easy way for them to replace income taxes entirely with tariffs. They might be able to give a small tax break through by income taxes, cut rates a little bit, or increase the minimum deduction a little bit. But I don’t see them replacing income taxes this way.

BRAY: What is the impact that you see that the market volatility will have on Canadian investments?

CHILDS: The fasten seat belt sign is on, you got to get back in your seat and buckle up. It’s going to be rough. Nobody’s sure how long this is going to go, and nobody’s sure what the ultimate impacts are going to be. Even Tiff Macklem, the governor of the Bank of Canada, the modeling they do, which is top flight modeling, there are huge margins of error, and a lot of it depends on how Canadians react and how other countries react.

BRAY: What does bounce back look like from this?

CHILDS: If you look at the bank Canada modeling, there is none. So if we go down this road for any length of time, and companies go ahead and move to the U.S., they’re gone probably forever, and we’ll have to grow from a lower base. That’s what I understood. So getting into this trade war, it’s not like a standard recession, where you have this cut back. Everybody kind of hunkers down for a little bit and waits and then when people start feeling better, they run out and spend a whole bunch. If we lose the industry. So if we see automotive manufacturing suddenly pick up and move to the U.S., if we see financial firms move to the U.S., they’re gone and they’re not coming back. So we have to grow new ones from scratch, and that’s a slow, long process.

BRAY: I’m curious to know, is there a counterbalance for our economy? People buy more Canadian products. Will that have a positive effect, and how much does that balance the scale? If we see an increase in purchasing power in our country of Canadian products.

CHILDS: It is going to help. There’s no question there. And getting rid of those tariff and the trade barriers between provinces will go a long way to getting us back to where, you know, help offsetting the cost of this. That said, some people will say it will almost get all the way there. I don’t think so. I’m a little more pessimistic than that. Just the scale of the two economies is so different. I mean, if we look at selling into the U.S. for Saskatchewan, that’s a market of what, you know, 300 odd million people, 350 million people, whereas the Canadian market is 40 million people. That’s access to California, not the entire U.S. So yeah, it’ll help, but it won’t get us all the way there.