(Bloomberg) -- Canadian real gross domestic product may be as much as 1.7% lower by the end of 2028 if Donald Trump wins the presidency and Republicans rule the House and Senate than if Kamala Harris wins, economists at Desjardins say.
A Republican sweep next month would likely lead to lower global and US real GDP over the next four years, economists including Jimmy Jean and Randall Bartlett said in a report, compared with a Harris presidency and divided Congress, which they assume as their baseline.
Trump has said he would apply a 10% tariff to all US imports and a 60% tariff on imports from China. While Canada has a relatively small trade surplus with the US compared with other trading partners, the US is the destination for roughly three-quarters of its exports.
“That said, the deeply integrated nature of North American supply chains gives us hope that some exceptions to blanket tariffs could be negotiated,” the authors wrote. “Energy is one possible group of commodities that could avoid the sting of higher customs duties.”
Jean, Bartlett and their co-authors assume Trump is unlikely to levy tariffs on energy products to avoid higher costs for consumers. However, they note he wants to usher in a new era of “drill, baby, drill” — and a ramp-up in US oil production would lead to lower prices, a drag on Canadian corporate profits and household incomes.
Other key commodities at risk of higher tariffs include precious metals, wood, aluminum, iron and steel. As for manufactured goods, motor vehicles and parts are highly exposed to tariffs, as are industrial machinery, equipment, reactors and parts; plastic; electrical and electronic equipment; and aircraft and spacecraft, the economists said.
There are mitigating factors. A blanket tariff on all imports to the US would lead to less substitution of Canadian exports with products from elsewhere, the authors said. Further, the US may not be able to rapidly find domestically manufactured products to replace those from abroad.
Recession Odds
Canadian exports would probably increase just before tariffs are applied as US importers look to build inventories before the fees come into effect, the Desjardins economists wrote. It would then take about a year for exports to fully reflect the new tariff regime.
Taking all this into account, the writers assume a 10% tariff on non-energy imports to the US would reduce real exports from Canada by nearly 2.7% by the end of 2026, compared with the baseline scenario. That would continue as long as tariffs remain in place.
Equity values in both the US and Canada are likely to see a boost, though, from a Republican sweep in November, which would lead to corporate tax cuts and deregulation. The S&P/TSX Composite Index would likely underperform against US equities and struggle over time, however, from lower energy prices and the drag on domestic growth.
That drag would probably prompt the Bank of Canada to ease policy more quickly and result in a deeper rate-cutting cycle, they say, while the Federal Reserve may need to slow the pace of rate cuts.
Canada is unlikely to let new US tariffs go unanswered, the economists wrote. As during the last Trump presidency, Canada is expected to apply reciprocal tariffs to goods that would have the greatest impact on the US economy, such as manufacturing inputs. But while this may hurt the US, it could be just as damaging to Canada, they warned.
“While a recession may be narrowly avoided, it can’t be ruled out,” they say. “Businesses and policymakers would be well advised to hope for the best but plan for the worst.”
--With assistance from Jay Zhao-Murray.
©2024 Bloomberg L.P.