This post memorializes selected statistics for the Canadian economy at the outset of the American global tariffs. The tariffs are intended to be an instrument to radically reshape the international merchandise economic trade system.

The national governments of the three major economies of North America have changed over the last year. As a whole, the economies of Canada, Mexico and the United States account for thirty per cent of global gross domestic product, down from the upper thirties during the early 1980s. The new government of the United States is making radical unilateral changes to the international trading system. This post benchmarks the pre-shock state of Canada’s macroeconomy at the industrial aggregate level.

American tariffs are taxes imposed by the American government on specified goods entering the United States from specific countries. The impact on the Canadian economy will, from the perspective of the American consumer (commercial and household consumers) increase the cost of Canadian imports. Higher costs for Canadian products would normally lead to reduced demand for Canadian production. The natural reaction by Canadian producers would be (1) reduce production, (2) find alternative markets, (3) reduce price for American importers, or (4) innovate and produce higher valued products not subject to the tariff. Undoubtably Canadian producers will adapt a mix of strategies. A real life example are the strategies employed by the Canadian softwood lumber exporting industries who have been embroiled in a “forever tariff war” with the Americans for the last couple of generations.

Three metrics are identified in this post. Each focuses on the total value of Canadian production, with no reference to exports to the United States. The United States is in the dominate destination for Canadian exports and Canadian economy is dependent on the value and volume of trade with the American economy so changes to the international trade rules are expected to have an impact on the value and volume of production of goods and services within the Canadian economy.

The first metric is to identify any changes from trend for the Canadian economy before and after imposition of the new tariff rules. See Figure 1 below. Actual Future performance will be compared to the long term trend before the tariff war.

Figure 1 indicates that Canadian GDP increased steadily over the reference period. Two breaks from trend were the global financial crisis 2007 and the covid-19 pandemic 2020. The simple linear trend is very robust with an R-squared of 98%. In the absence of a disruption to the status quo, the Canadian economy is expected to continue on its growth path.

The tariffs will be applied against goods. Application on services would be complex and this far there have been no announced intentions to extend tariffs to services. Since the new tariff structure will introduce international price cleavages between service producing industries and goods producing industries it is expected that the balance will change in the Canadian economy. The existing balance is shown in Figure 2,

The focus of concern for the American government is the home shoring of manufacturing jobs. Figure 3 shows the share of the Canadian economy accounted by manufacturing industries and the other primary goods-producing industries namely natural resource based industries and construction, It is clear that Canadian manufacturers have been trending downward since the start of the century. The other goods-producing industries have been maintaining their share. If the Americans are successful at home-shoring manufacturers, one would expect Canadian manufacturing industries to accelerate their decline.