Canada would suffer smallest hit in reciprocal tariffs

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Canada fares the best if United States President Donald Trump ends up imposing reciprocal tariffs, according to a new report by Yale University.

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The university’s Budget Lab estimated tariff rates on Canada would increase by 4.59 percentage points, which would be the smallest among the 20 countries studied.

Other G7 members fare worse, with Japan’s tariff rate rising by 10.9 percentage points, France’s by 18.9 percentage points, Germany’s by 19 percentage points, Great Britain’s by 19.9 percentage points and Italy’s by 23.2 percentage points.

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Mexico, the third partner in the United States-Mexico-Canada Agreement (USMCA), would have tariffs rise by 16.3 percentage points.

The Budget Lab calculated the increases using value-added tax rates (VAT), or the goods and services tax (GST) in the case of Canada, and matched those rates on a commodity-by-commodity basis, distinguishing between 65 goods and services. The modelling excluded areas such as currency and trade policy that were mentioned in Trump’s order.

“(The results) made a lot of sense once we sort of processed what was going on here,” Ernie Tedeschi, director of economics, said.

Canada came out ahead in the exercise because the GST is low compared with VAT taxes in Europe and Mexico’s federal tax, which is 16 per cent, he said. Provincial sales taxes were not included in the calculations.

“Reciprocal tariffs to begin with, even if countries don’t retaliate, make everybody worse off, including the United States,” Tedeschi said. “And then when countries retaliate to those, it then makes everybody further worse off.”

Karl Schamotta, chief market strategist at Corpay Inc., said “Canada looks well insulated against reciprocal tariffs,” based on the Budget Lab’s study.

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“Reciprocal tariffs could be absurdly difficult to put into practice — some estimates indicate that the government would need to manage 2.6 million individual tariff rates — terrible for consumers, and extremely costly for almost every business trading across American borders, but shouldn’t pose a material threat to the Canadian economy, given that trade barriers against U.S. imports are already extremely low” due to the USMCA, he said in a note on Wednesday.

The threat of tariffs rattled markets and currencies on Tuesday when Trump reiterated the March 4 deadline for imposing them was on track, though a later media report appeared to indicate he was referring to reciprocal tariffs.

The confusion is understandable given the number of Trump’s tariff pledges piling up.

First out of the gate was the threat of 25 per cent duties on all imports to the U.S. from Canada and Mexico, followed by aluminium and steel tariffs and then reciprocal tariffs. Yesterday, he introduced the prospect of tariffs on copper imports.

On Feb. 13, Trump signed a “presidential memorandum” ordering the examination of “unfair practices” where other countries impose higher tariffs on goods than the U.S. imposes.

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“What constitutes an unfair practice is extremely vague and covers almost all aspects of international trade relations,” Charles St-Arnaud, chief economist at credit union Alberta Central, said in a note Wednesday.

“In the Canadian context, there are some areas where the U.S. could find reasons to retaliate,” he said “primarily” in the areas of the supply management of milk and eggs, the GST, the digital tax, “the foreign ownership threshold in some sectors, notably banks, telecom, airlines and any retaliatory tariffs from Canada.”

• Email: gmvsuhanic@postmedia.com

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