The possibility of a 25 per cent tariff being levied on Canadian goods by the United States has been looming for weeks. With confirmation from The White House that tariffs will go into effect at midnight February 1, Trent School of Business Director Dr. Byron Lew says the fallout of such a policy is significant.
According to Professor Lew, once these tariffs are implemented, the Bank of Canada estimates a hit of approximately 4 per cent to Canada's GDP a shock comparable to a severe recession. While the immediate effects may be delayed due to pre-existing trade contracts, long-term consequences could be profound. Canadian manufacturers and exporters, particularly in Ontario, may face investment slowdowns, layoffs, and declining production as contracts expire and businesses reassess their supply chains.
Short-Term and Long-Term Economic Effects
"In the short run, we might not see an immediate disruption to the flow of goods, but investment will slow down, and production will begin to adjust," explains Prof. Lew, who is also the chair of the Economics Department at Trent. "Some industries, especially in manufacturing, will start reducing shifts, leading to job losses. Resource exporters may also face significant challenges."
The longer-term effects could be even more concerning. If tariffs persist, businesses will need to rethink their strategies, either by diversifying trading partners or shifting to a more self-reliant, protectionist approach. However, diversification is easier for some industries than others.
"Commodities, such as oil and minerals, have alternative markets in China, Japan, and the European Union. Considering manufacturing, this relies on tightly integrated supply chains, finding new partners is much more complex," Prof. Lew adds. "Canada's geographic proximity to the U.S. has long been an economic advantage. Without it, we face challenges similar to those of some South American countries in expanding our manufacturing base."
How Can Canadian Businesses Mitigate Risks?
Canadian businesses need to act strategically now that we know these tariffs are reality.
"As we've seen in the last few weeks, every time there's a maybe' from the U.S., it creates an investment risk. Companies hesitate to commit to long-term projects under unstable conditions," Prof. Lew says.
He emphasizes the need for Canadian businesses to continually seek alternative trading partners while acknowledging the difficulties in replacing U.S. trade completely.
"The U.S. has been the most important and, until recently, one of the most stable economies to trade with. Now that stability is in question."
How Should Canada Respond?
One of the key debates in this situation is whether Canada should respond with reciprocal tariffs, for which details are fluid, but are said to be reciprocal.
"There are two schools of thought on this," Prof. Lew explains. "On one hand, retaliatory tariffs will undoubtedly hurt us in the short term, but they could serve as a lever to pressure the U.S. into reconsidering their policies. Canada is one of the U.S.'s top three trading partners, so our actions are not insignificant."
However, the effectiveness of this strategy depends on political dynamics in the U.S.
"Trump, as a political figure, is not easily swayed by economic pain, so some argue that retaliation will simply add costs without changing the outcome. Another option would be to levy export taxes on key U.S. imports, such as oil, allowing Canada to retain revenue and compensate affected industries. This would have a similar economic effect on U.S. consumers without simply absorbing the loss ourselves."
Prof. Lew says Canada must take immediate steps to navigate these challenges now that tariffs are certain.
"In the short run, we will face disruptions. In the long run, this could push Canada to become less dependent on the U.S. and explore new economic opportunities elsewhere. Whether that shift will be smooth or painful depends on how businesses and policymakers respond."
Dr. Byron Lew's expertise spans several key areas of economic research, including the economic history of Canada and North America, international economics, and the diffusion of agricultural technology. He also focuses on the relationship between trade and technology, examining how innovations spread across industries and borders. His insights are particularly relevant to discussions on historical and contemporary trade policies, economic development, and the impact of technological advancements on global markets.
