Trump’s tariffs may be best fought by Canadians themselves

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President Donald Trump ramped up his trade war last week with 25-per-cent duties on all autos made outside of the United States — and that’s before the tariffs he has promised to reveal Wednesday.

Prime Minister Mark Carney called the tariffs a “direct attack” on Canada but held off on retaliation. On Friday in what Trump described as a “productive talk” the two agreed that trade negotiations would resume after the Canadian election.

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However, the auto tariffs will still come into effect on April 2, and though Canada may get off with a “lighter touch,” the penalties will be a blow, especially in Ontario, where 100,000 jobs are tied to the industry.

“There are choices to be made in how to respond, and Canada’s policy makers need to think about what will be most effective, not just what will feel good in the moment,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

Shenfeld argues that applying our own 25-per-cent tariff on American-made auto parts would be self-defeating because it would raise the price of Canadian-made vehicles in addition to the U.S. tariff.

Nor is slapping our own tariff on autos shipped from the United States a great scheme because it would “significantly” stoke Canadian inflation and favour vehicles made overseas which contain no Canadian content. There is also the risk Trump would retaliate with even higher tariffs.

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Ottawa could step in with incentives to encourage car makers to continue operating their factories north of the border, but these could be viewed as a subsidy and again attract retaliation.

“An alternative, or at least a complementary measure, would be to let Canadians apply their own penalty on U.S. exports, through the choices they are making at the supermarket, in the shopping mall, at their car dealer, and at the travel agency,” said Shenfeld.

It is too early to show up in data, but CIBC is getting anecdotal evidence from “a broad range of clients” that Canadians are taking action in their purchases and vacations to avoid America.

What is now a grassroots movement could be ramped up by publicly funded marketing and targeted ads by Canadian goods suppliers, retailers and tourist agencies, he said.

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“That’s not something that the Trump administration can point at finger at our government and retaliate against,” said Shenfeld.

“Choosing not to buy something is the right of every citizen in a free society, and if joined by Mexican, European and Asian countries, could apply more pressure on the U.S. economy, and its political leaders, than tariffs alone.”

Americans themselves could be another point of pressure for Trump, when they realize how much their next car is going to cost them.

Over the past year, the United States assembled 10.75 million vehicles and bought 16.07 million, leaving a gap of more than 5 million cars and trucks that need to be filled, said Douglas Porter, chief economist at BMO Capital Markets.

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Trump has said he wants to bring manufacturing back to the United States but that could take years, “so, even with a tariff wall, the U.S. will be importing a lot of vehicles, saddled with heavy-duty tariffs,” he said.

The president has reportedly warned automakers against price hikes, and that may initially keep prices in check, “but it’s tough to fight the laws of economics,” said Porter.

BMO expects vehicle prices overall to rise 10 per cent in the U.S. and sales to drop about 5 per cent from where they were before tariffs.

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Canada’s economy grew faster than expected in January, but the 0.4 per cent gain doesn’t tell the whole story, said David Rosenberg of Rosenberg Research & Associates Inc.

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Most of the activity was in the goods sector which grew 1.2 per cent as exporters pushed through product ahead of U.S. tariffs expected this week. Services stalled at 0.1 per cent.

Statistics Canada is predicting a flat February and Rosenberg forecast a sharp contraction in  second-quarter real GDP.

“A storm is coming to the Canadian economy, and the Canadian dollar is a strong sell,” he said.

• Air Canada annual general meeting
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This 65-year-old woman wants to keep working past 70 and wonders if that will affect her Canada Pension Plan and Old Age Security. FP Answers offers some suggestions on how to make the best use of her investments and savings.

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McLister on mortgages

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Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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