University of Calgary economist Trevor Tombe takes Donald Trump literally. “Next year will be a #cdnecon recession,” Tombe tweeted after the U.S. president-elect declared he intends to apply tariffs of 25 per cent on Canadian and Mexican imports unless the governments of each country do more to impede illegal migration and the trafficking of fentanyl.
There are no celebrity economists in Canada, but there are a bunch who influence the conversation on the strength of their analysis and willingness to critique public policy on social media. Tombe is in that group. He’s a prolific writer of commentaries and a go-to source for not only journalists, but institutions in need of an outside opinion. The Bank of Canada appointed him to the three-person committee of experts it assembled to review its use of extraordinary monetary policy during the COVID-19 pandemic.
Tombe’s hot take on Trump’s tariff threat was informed by research he did earlier this year for the Canadian Chamber of Commerce. His model found that a 10 per cent blanket tariff on imports would result in a decline of inflation-adjusted incomes of about 0.9 per cent. A little abstract, but even those of us with rudimentary math skills got the point: tariffs would make us poorer.
It isn’t 2017, when the shock of Trump’s win was compounded by the realization that he was serious about harassing America’s most important trading partners for better deals. But he retains his ability to generate excitement. It wasn’t hard to find people on Tuesday with opinions on Canada-U.S. trade. My inbox filled up with commentaries and interview offers.
Then of course there was social media, where Tombe told his 42,300 followers on X that, based on the model he used for the Chamber of Commerce report, a 25 per cent tariff would result in a hit to gross domestic product of about 2.6 per cent—the equivalent of roughly $2,000 per person. That was less abstract than his previous work: the tariffs that Trump threatened would be a catastrophe.
Tombe was hardly alone in imaganing worst-case scenarios. Andreas Schotter, an associate professor of international business at Western University’s Ivey Business School, shared notes on his initial thoughts about the implications of a 25 per cent tariff on U.S. imports that included this point: a re-acceleration of inflation to something faster than three per cent, and “a collapse of the Canadian social welfare and health-care system as it stands.”
But that’s not what Schotter expects will happen. He takes Trump seriously rather than literally. The U.S. buys a lot of stuff from Canada, so in many ways, raising the cost of goods and services from this country is like raising the cost of goods and services from Michigan. If Trudeau retaliated with tariffs of his own, as he did during the first Trump presidency, the negatives would be amplified. “Despite the rhetoric, broad tariffs are unlikely to materialize at either level,” Schotter said. “Instead, tariff threats are more likely to serve as leverage for [North American trade] negotiations in 2026.”
The biggest mistake when forecasting is assuming that the past is prologue. Mathematical modeling is good for creating a benchmark, but economists have a poor track record of anticipating human behaviour. That’s why the Bank of Canada insists on setting policy on a meeting-to-meeting basis. It can calculate a path for interest rates, but has no idea if the real world will co-operate.
Canada’s business community has spent most of this year obsessing over the 2026 deadline to extend the new North American trade agreement that emerged from Trump’s threat to end the previous one. Canadian diplomats and members of Prime Minister Justin Trudeau’s cabinet have been leading “Team Canada” missions around the U.S. for months. Trudeau reassembled the special cabinet committee on U.S. relations a day after Trump was declared the winner of the election. The country’s decision makers weren’t caught flat-footed this time. It’s easy to forget, but Joe Biden is still president of the United States and will be for another two months. There’s lots of time to get a plan together.
The Canadian dollar has fallen about five per cent against the U.S. dollar since the end of September, providing some indication of how currency traders think the country will fare amid a constant threat of tariffs. Bold companies will use the exchange rate to their advantage. Dentons, a law firm, advised stockpiling as much stuff as possible in the U.S. before inauguration on Jan. 20.
American buyers surely will be happy to help, considering their currency buys considerably more in Canada right now than it does at home. The exchange rate likely will remain an advantage going forward, and could help startups attract U.S. investors. All things equal, trade uncertainty will give the Bank of Canada another reason to continue cutting interest rates, lowering the cost of capital and reviving domestic demand.
These are reasons to avoid panic, not go back to sleep. Schotter said in an interview that Canadian companies in need of the scale that America provides should set up there so they can operate without the constant threat of tariffs. “Double down on the U.S.,” he said.
Politicians will dislike the sound of that. Trudeau’s government along with Ontario and Quebec have spent hundreds of millions on a bet that companies would see Canada as a good place for their North American operations, and Alberta has grown used to selling oil to the U.S. free of hassle. But that doesn’t mean all is lost. It means governments will have to try harder to make Canada a more competitive economy.
There is lots of low-hanging fruit. Increasingly, companies cite Canada’s regulatory thicket as the reason they don’t invest, and much of that frustration is the result of the provinces’ refusal to negotiate a proper trade agreement among themselves. When first ministers gather today for their emergency call on what to do about Trump, the answer will be right there on their screens.
Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.
