(Bloomberg) -- The man who led Canada’s trade negotiating team during Donald Trump’s first term said the US President-elect “likes tariffs even more now” and will be less constrained about about using them in his second.
Steve Verheul, who was Canada’s chief trade negotiator from 2017 to 2021, said Trump’s threat of 25% tariffs on Canadian and Mexican imports would be a significant economic hit to all three countries, creating “a highly disruptive period of time.”
But if the Trump administration tries to levy tariffs on all manufactured goods from Canada, but not oil and agricultural commodities, Canada has a card it can play — it can place export levies on those goods as a negotiating tactic, said Verheul, who’s now a private consultant.
Canada is by far the largest external supplier of oil to the US and a huge exporter of agricultural goods. Export levies would quickly drive up the cost of fuel and food to American consumers. Some US refineries are highly dependent on Canadian heavy oil and would have few alternatives.
“I agree that the first areas that would be potentially subject to exemption would be oil and gas and food,” Verheul said at an event organized by Bank of Montreal. This is “clearly understood” inside government, he said — and if that happens, “it might even make sense for Canada to apply export taxes to those products, in order to try to negotiate a broader exemption across all the sectors.”
Such a move would likely be a last resort for Canada, which would find its economy in a tough spot if Trump were to follow through with tariffs at such a high level. But Verheul said he believes government officials are actively considering export taxes “as an additional means to put pressure on.”
Doug Porter, Bank of Montreal’s chief economist, said financial markets clearly believe the risk of broad tariffs is overstated, given the relative stability of the Canadian and Mexican currencies after they initially sold off in the hours after Trump’s social media post last week.
“I suspect that that calm is highly questionable,” Porter said. “I think we should take the threats seriously, or at the very least, prepare and consider what broad-based tariffs could mean for the economy.”
Tariffs of 25% against Canada and Mexico would leave the two North American trading partners in a worse position for exporting to the US market than other members of the World Trade Organization, Verheul said. “We would really be in a place where only Russia, North Korea and a handful of other countries would have worse access.”
In the case where Trump imposes big tariffs and Canada retaliates, Canada’s gross domestic product could be reduced by 3% or more, leading to major monetary and fiscal policy responses, Porter said.
The Bank of Canada may be forced to cut the benchmark interest rate as low as 1.5% in the extreme case of broad-based tariffs, Porter said. It’s currently 3.75%.
Meanwhile, the government “would be quite reasonable to provide all kinds of support” through spending, Porter said. “I think we would be talking, roughly speaking, on the order of about half a per cent of GDP of fiscal support.”
Tariffs can be partially counteracted by currency depreciation, and in the worst-case scenario, “I think a depreciation of the Canadian dollar of 5% to 10% from current levels would be within reason, it’s entirely conceivable,” Porter said. The latter would take the Canadian dollar down to about C$1.56 per US dollar, a level not seen since 2003.
--With assistance from Erik Hertzberg.
(Adds additional comments from Verheul on export taxes, beginning in the fifth paragraph.)
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