Supply Chain Scanner - Week of January 20, 2025
Weekly blog by Emily Atkins
Trump tariff threats not credible, economist says
Donald Trump will be inaugurated on January 20th, a couple of days from the date this blog was written, and Canadians are on tenterhooks waiting to hear whether he will follow through with his plan to impose tariffs.
For economist Carrie Freestone, with RBC, the worst-case scenario – with 20 percent tariffs imposed pretty much across the board – could result in a hit to Canadian GDP of six percent within three years. However, Freestone also believes, along with many of her counterparts at other financial institutions, that this will not happen, and Trump will back off.
“It's not in our base case,” Freestone said, speaking in a CITT-hosted webinar on January 15. “We do expect some tariffs will likely be introduced, and it is something that we're keeping our eye on. But again, we're trying to focus on whether these tariff threats are credible versus non-credible, and right now we're seeing them as largely a negotiating tactic.”
However, the danger is, if Trump does go with a higher percentage, Freestone noted that Canadian production costs would be elevated compared to the US. Immediately, we would see weaker demand for Canadian imports from the U.S.
“So we would be in a situation where we would have to offset that weakness with exports to somewhere else, right? And that's not something that can be adjusted immediately. We'd also be in a situation where we could face higher prices in Canada. And the reason for that is because, again, the goods that we purchase in Canada are highly integrated,” she explained.
Producers’ ability to pass higher costs off to consumers could be complicated by the weaker demand situation we are already experiencing here and could result in an uptick in inflation Freestone added.
On the positive side, Freestone pointed out that when Trump imposed tariffs in his last presidency, his goal was to create US manufacturing jobs. And he failed. “If we look at the steel and aluminum sector, primary metals, we've actually seen fewer jobs have been created since those tariffs were introduced,” she said.
She also noted that the US balance of trade also did not improve after tariffs were imposed on China. “We think that Trump realizes this. So again, we're in a situation where there will probably be some form of tariffs, but we're not thinking that 20 percent tariffs is the base case by any stretch.”
However, Freestone said she is more concerned about the dampening effect that uncertainty may have on Canadian business investment. Not only is there the big unknown of Trump’s intentions, but we also have a political question to settle, with the election of a new government and prime minister this year.
Freestone calls the lack of investment here at home a “more credible threat” than Trump’s exaggerated tariff threat. “We're struggling with productivity challenges in Canada. We're struggling to get infrastructure off the ground,” she noted.
As far as economic fundamentals going into 2025, the outlook is mixed. The Canadian dollar is expected to continue its drop against the greenback into the second quarter, thanks to the discrepancy between US and Canadian interest rates. On the positive side of the ledger, Freestone said inflation is down and expected to stay that way, bar unexpected shocks like tariffs. Per capita GDP is another bright spot, with previous years’ decline reversing in 2025. And finally, Canada’s manufacturing outlook is good, and better in fact than the US and Europe.
“It's very much a story of strength of the U.S. rather than weakness out of Canada,” Freestone asserted. “We don't think that it's going to be the best year for the Canadian dollar, but we think that things will start to improve in the back half of the year as economic activity starts to improve. And once we get that overnight rate down to 2% by the middle of this year, we think that things will improve in Canada because that will spur economic activity.
“People will start to invest more. The spring housing market's going to come back. Things will be a little bit stronger here in Canada in a lower interest rate environment, and households will start to spend,” she concluded.
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Emily Atkins
President
Emily Atkins Group
Emily Atkins is president of Emily Atkins Group and was editor of Inside Logistics from 2002 to 2024. She has lived and worked around the world as a journalist and writer for hire, with experience in several sectors besides supply chain, including automotive, insurance and waste management. Based in Southern Ontario, when she’s not researching or writing a story she can be found on her bike, in a kayak, singing in the band or at the wheel of her race car. LinkedIn: https://www.linkedin.com/in/emilyatkinsgroup/