These extreme measures have rattled Canada’s economy, with so much uncertainty about the future, it’s lead to job losses in the auto industry and a downturn in the housing market. In response, Canada implemented retaliatory tariffs and is working on building better trade relationships with other countries to lessen our reliance on the U.S. with Prime Minister Mark Carney stating that the Canada-US trade relationship, as we knew it, “is over.”
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But what are tariffs, exactly?
Think of tariffs like a cover charge at an event. Countries basically charge an entry fee for stuff coming in from other countries. So, if the U.S. imports cars from Canada, and a tariff is in place, the U.S. charges an additional fee at the border before letting the goods in. That increase in cost is often passed along to consumers.
Tariffs are meant to “protect domestic businesses”—in other words, governments want you to buy goods made in your country, but when governments hike tariffs, like Trump’s recently done, the cost of goods must go up too in order to protect profit margins, making foreign products more expensive. It’s the people buying the products that pay the tariffs, and those suppliers feel the impact of lack of competitive pricing.
Obviously some things are just nice to have, but the real trouble arises when tariffs are hiked on everyday necessities, like cars, food and materials like aluminum and metal (think cars, laptops, phones, construction, tools and medical gear). That’s when trade wars start, and the consequences are felt both immediately and for years to come. The kind of stuff future generations will learn about in history class.
Speaking of history, when was the last time something like this happened between the U.S. and Canada? Donald Drummond, former chief economist at TD Bank and Fellow and adjunct professor at the School of Policy Studies at Queen’s University and Fellow-in-Residence CD Howe Institute takes us back nearly a century to the Smoot-Hawley Tariff Act of the 1930s, where a U.S. law jacked up tariffs on over 20,000 goods.
“They were higher and much more pervasive than steel and aluminum,” he says. “And prior to that was the 1890s. This is the third time in Canada-U.S. history over the last 130 years. Both the 1890s and 1930s ended very badly, not just for the world and Canada, but ended very badly for the United States.”
“They didn’t succeed in their objectives, and ended up removing tariffs, in both cases,” Drummond explains. “Particularly in the United States case in the 1930s—really dramatically—just totally changing their policy thrust after a while.” The 1930s mirrored recent events where the U.S. imposed higher tariffs, leading other countries to retaliate. In economic literature, it’s what’s known as the cobweb diagram, illustrating each round of retaliation: the U.S. raises tariffs, others respond, and the cycle continues.
Basically, global trade collapsed, the Great Depression worsened and the policy backfired—hard. What’s happening now, Drummond says, “seems very, very familiar.”
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