Two Wrongs Don't Make A Right

 

President Trump's deadline for imposing 25% across-the-board tariffs on Canadian products is today.

While it remains to be seen whether they will actually be implemented immediately, how they will work, and how long they might last, just the threat has turned Canadian politics upside down in recent weeks.

As of yesterday, the most recent information available suggested a 25% tariff is coming on all goods except oil, which may be subject to a lower rate of 10% - thanks in large part to Alberta Premier Danielle Smith's direct advocacy work.

The federal government in Ottawa are considering a response, including imposing retaliatory tariffs on US products imported into Canada, or even restricting the export of oil to the US!

This response has been cynically framed as a "Team Canada" approach, in an attempt to suggest that anyone who dares to disagree with these proposed policies must actually be opposed to Canada.

But, this reveals a fundamental misunderstanding of economics and risks doing far more harm than good.

Yes, tariffs are stupid - but history shows us that they hurt the country imposing them far more than the country they're imposed on.

This means retaliatory tariffs are even stupider - they hurt the country trying to retaliate more than the country they're trying to retaliate against!

Think of it this way - if your neighbour crashed their car into your fence, would you crash your car into their fence to get even with them?

 

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Why Free Trade Is Good

 

First, let's take a step back and remind ourselves why trade is a good idea to begin with, because so many of our political leaders seem to have forgotten.

In short, trade is good for both sides, because it allows both sides to focus on producing things that they have a special advantage in, and then they can trade for things that they don't have a special advantage in.

Could we grow bananas in artificial greenhouses in Canada? Sure!

Should we? No, of course not!

Could a land-locked warm country set up massive onshore fish farms? Sure!

Should they? No, of course not!

It makes far more sense for us to fish and for them to grow bananas, and by trading we can both have fish and bananas for less than it would have cost to do it ourselves.

Multiply that efficiency gain across hundreds of countries and millions of products, and you get the kind of economic growth that has pulled human civilization out of poverty and into the modern era.

None of this is particularly controversial - Scottish economist Adam Smith taught us all this in 1776 - but politicians like to ignore it when it's politically convenient to do so.

 

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Why Tariffs Are Bad

 

President Trump is apparently concerned that the US has a trade deficit with Canada - meaning we sell them more than they sell us.

The magical thinking behind tariffs is that they make imported goods more expensive, which encourages consumers to buy domestically produced alternatives, helping boost domestic industry.

But this makes no sense for a few reasons.

First, a trade deficit isn't a bad thing.

I have a trade deficit with my local supermarket.

I buy far more from them than they buy from me!

What matters is that I value the things I buy from them more than I value the money I give them in exchange for those things.

If they wanted to buy something of mine and were willing to offer me more money than I value that product at, then I'd happily sell it to them, too.

But the fact they don't want to buy anything of mine doesn't mean I should stop going to their store!

If anything, the fact the US has a trade deficit with Canada is just a natural result of them being a rich country that can afford to buy lots of expensive things from us.

Second, it's important to remember that tariffs are paid by the people in the country imposing the tariff, not by the country on which the tariff is being imposed.

When the US imposes tariffs on Canadian products, it’s American consumers who bear the brunt of higher prices.

Tariffs also harm industries that rely on imported goods as inputs for their production.

Even when the final product is made locally, tariffs raise the costs of the imported inputs, meaning tariffs reduce competitiveness and productivity of domestic industries too.

And, centuries of economic research demonstrate that the harm to consumers and dependent industries from tariffs outweighs the benefits to domestic producers.

This is why economists overwhelmingly oppose tariffs.

When you add up all the numbers on both sides of the ledger, the harms massively outweigh the benefits, resulting in a net loss for the economy of the country imposing the tariffs AND the country that the tariffs are being imposed on.

And here’s the kicker - even when only one country imposes tariffs, the harm to its own economy still exceeds any benefit.

 

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Why Retaliatory Tariffs Are Even Worse

 

If Trump’s tariffs are a bad idea for Americans, Trudeau’s proposed retaliatory tariffs would be an even worse idea for Canadians.

The idea of retaliatory tariffs or export restrictions is based on flawed logic.

Proponents argue that retaliatory measures are necessary to “punish” the US for imposing tariffs.

But, once you understand that tariffs are worse for the country imposing them than they are for the country they're being imposed on, you can see why that doesn't make sense.

As in the example above - if your neighbour crashed his expensive car into your fence, you wouldn't go crash your expensive car into his fence to get even.

Canada’s trade relationship with the US is also asymmetrical, making retaliatory tariffs especially harmful to our economy.

77% of Canadian exports go to the US, while only 18% of US exports come to Canada.

So, in our analogy, it's actually more like your neighbour crashing 2 of his 10 cars into your fence, and you retaliating by crashing 8 of your 10 cars into his.

The idea of export restrictions on oil is even crazier.

Yes, we know it must be tempting for Ottawa politicians to use Alberta's primary export product as a negotiating tactic, because oil and gas make up nearly 40% of Canada’s exports to the US.

But this would be utterly devastating for Alberta’s economy, precisely because Ottawa has left Alberta's oil and gas industry dependent on the US, by blocking pipeline construction that would have let us sell our products to anyone else!

Contrast this with Ontario and Quebec, where Premier Ford and Premier Legault are generously offering to "sacrifice" their own industries for Team Canada.

Except, you'll notice they're not offering to put export restrictions on their "major" industries, like auto manufacturing in Ontario or aerospace in Quebec.

No, they're offering to sacrifice much smaller sectors of their economy while complaining that Alberta won't offer up our major industry - oil and gas.

Here's the problem:

Ontario's top five exports (including the auto industry) COMBINED barely make up less than half of Alberta's oil and gas exports.

Alberta's oil exports are more than Quebec's total exports of EVERYTHING!

You'd have to restrict the export of 80% of Ontario's products and 100% of Quebec's products for those restrictions to have the same impact on Ontario and Quebec as a restriction on oil and gas exports would have on Alberta.

Would Ford and Legault be singing the same tune if Ottawa were proposing export restrictions on 80-100% of their products, rather than just a handful?

 

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A Real Team Canada Approach

 

Instead of retaliating with tariffs or export restrictions, Canada should pursue a smarter, more principled approach.

 

First: We should take the high road.

 

Keep talking about and supporting the benefits of free trade.

It's harder to argue against US tariffs if, in the same breath, you're talking about how you plan to do the same.

Remember - two wrongs don't make a right.

Instead of abandoning free trade, Canada should defend it.

 

Second: We should make a deal.

 

This dispute will ultimately be resolved through diplomacy; the only question is how long it will take.

The lesson from Trump's first term was not to take anything he says literally.

Sometimes, he says he just wants Canada to fix the border; sometimes, he says that won't suffice.

Best we can work out, there's a faction of his advisors who love tariffs, think they're amazing and don't want a deal, and there's a faction of his advisors who know tariffs are silly but are supporting them in the short term to get what they want on border, defence, and security issues.

The US is still our closest ally, and we have a lot of friends in Washington.

A deal can be had, if Ottawa doesn't panic and make relations worse.

 

Third: We should fix our own trade restrictions.

 

One of the key reasons so many Canadian industries are so reliant on exports to the US, is because Ottawa makes it ridiculously difficult to trade with other countries and even between provinces here in Canada.

As many are aware, pipelines and other infrastructure are desperately needed in order to be able to export oil, gas, and many other products to countries other than the US.

However, trade within Canada is massively restricted, too.

Lawyers, nurses, and other workers can't change provinces without expensive and time-consuming paperwork, businesses can't sell alcohol between one province and another, and there's even a type of truck that you can't drive at night in Alberta, but you can ONLY drive at night in British Columbia.

Individually, each of these restrictions might sound small, but combined, they have a big impact, and economists calculate that fixing them all could add up to a 5.5% wage increase for every Canadian.

As the saying goes, the best time to resolve these issues would have been 10 years ago - the next best time is today.

This would be a true “Team Canada” approach that would protect all provinces, rather than sacrifice Alberta to save Ottawa.

 

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If you liked this article, and you'd like to help us keep doing more of this kind of work, please consider making a donation to the Alberta Institute:

 

 

Together, we can stand for free trade, protect Alberta, and ensure a united, prosperous future for all Canadians.

I really appreciate all of your support, and thank you for making this kind of work possible.

Regards,

Peter McCaffrey
President
Alberta Institute


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  • James Kromm
    commented 2025-02-03 20:58:49 -0700
    Exactly, Peter.
    How we really hurt them, is to diversify our trading with other free traders. In other words, substitute, wherever possible, imports from other countries.
    Let the USA have their tariffs on our exports to them. The American people will pay them anyways. Let’s not do the same to ourselves.
    Secondly, we obviously need to move Canadas largest export (oil &gas) to other markets….do you hear us Eastern Canada….more pipelines. Again, diversify our customers er base.
  • Alberta Institute
    published this page in News 2025-02-01 03:27:44 -0700