Trump 2.0 could hurt Canada’s economy #CanadaFinance

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Soon after it became clear that Donald Trump was going to win the U.S. presidential election and the Republicans would control the Senate and possibly the House of Representatives, the Dow Jones index surged 1,300 points. In a way, the stock market’s vote of confidence was surprising: Trump’s economic platform is a mix bag. Tax relief and deregulation are popular with investors, but trade-disrupting tariffs and budget-busting deficits could push up interest rates down the road.

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For Canadians, however, the Trump bag is not so mixed: new economic threats from Trump’s America are clearly on their way.

Although budget matters typically need the co-operation of Congress, tariff policy is an important exception. The U.S. constitution requires Congress to approve any “Taxes, Duties, Imposts and Excises.” In 1934, however, Congress delegated international economic policy to the president. This was in done in the belief he or she would be less influenced by lobbyists pushing for industry protection, as had been the case with 1930’s Smoot-Hawley Act, which had sparked tariff wars and a sharp decline in trade that worsened the Great Depression. With the current vogue for industrial policy, both the Trump I.0 and Biden administrations had no qualms raising tariffs, especially on China.

Trump’s election promises included: renewing the 2017 personal income tax cuts, due to expire next year; reducing the corporate income tax rate on domestic manufacturing from 21 to 15 per cent; eliminating tax on tips and social security benefits (the latter very expensive to do); and removing the limit on deduction of state and local taxes (SALT) under the personal income tax. Regulatory changes would allow housing to be built on federal lands, expand fossil fuel development, eliminate EV mandates and relax some financial regulations.

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Whether wise or not, many of these changes would encourage economic growth. But Trump also proposes growth-killing tariffs of 10 to 20 per cent on all imports and at least 60 per cent on goods from China. Tariffs potentially as high as 200 per cent would be levied on imports attributed to companies that moved production to Mexico (e.g., auto manufacturers). Such policies have broad support among Republicans, not only for their protection of domestic industry, but also because the revenues generated would be used to cut income tax cuts.

Even if any tariff revenues remain after tax cuts, the Trump proposals will add to soaring U.S. deficits unless Congress agrees to significant spending reductions. Trump won’t touch Social Security, but he might undo some business subsidies, which could be less important as the tariff wall goes up.

Whatever happens won’t be good for Canada. A lower corporate income tax rate, deregulation and energy renewal will be magnets for investment from Canada. Tariff policy and a review of NAFTA 2.0 would be especially harmful as we would be shut out of U.S. markets. Given nationalistic economic leanings on both sides of the aisle in Congress, we should expect more not fewer trade restrictions in the next four years.

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What should we do? Two things. Create a new growth agenda and work hard to protect our access to the huge U.S. market.

Like Trump, Canada needs deregulation and tax reform to reverse our sliding economy. The goal is not to copy the U.S. but to tilt the playing field so we can attract business and skilled immigrants. We are a small market dispersed over a large land mass with less hospitable winter weather. To overcome these disadvantages we need policies better than those in the U.S.

We already have some advantages. Because of our education system, we have well-trained workers — a point often acknowledged by businesses who set up here. But we have a poor investment climate. It rains regulations here and our personal and capital gains taxes are higher than in the U.S. If Trump does cut corporate taxes, our much higher corporate taxes and carbon levies will hurt us even more. The good news is that these matters are fixable under our own control.

As for Fortress America tariff policies, we can’t control U.S. politicians, but we can try to influence them. As we have in the past, we need to remind Americans of the value of an integrated North American economy, which means creating fewer not more barriers to trade.

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A complete no-brainer is to stop poking the bear as by, for example, introducing a digital sales tax as countries still discuss a multilateral agreement on taxing Big Tech. Economically harmful policies like supply management should also be phased out over time, as Australia did. That would not only remove a big trade irritant but also bring Canadians lower food prices and new food-exporting industries.

We should also become more serious about our contribution to NATO and North American security and fulfil our defence commitments promptly and effectively. In fact, if you favour big ideas, we might start thinking about a trade and security pact with the U.S. that goes beyond NAFTA 2.0.

Bottom line? We can’t sit on our hands. We have competitiveness and market access issues with the U.S. that need to be dealt with starting now.

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