Is a recession inevitable? Why tariffs pose worst ‘trade shock’ since 1930s – National

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Is a recession inevitable? Why tariffs pose worst ‘trade shock’ since 1930s – National

U.S. President Donald Trump’s tariffs on Canada, and Canada’s retaliatory measures, could be the most “significant trade shock” that Canada has suffered in nearly 100 years, economists say.

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So does that mean a recession is inevitable?

A Royal Bank of Canada report on Sunday compared the trade shocks from Trump’s tariffs to the ones caused by the Smoot-Hawley tariffs of the 1930s.

The Tariff Act of 1930, which created what’s known as the Smoot-Hawley tariffs, was an American law that raised U.S. tariffs on a sweeping range of products being exported to the United States.

The tariffs were widely believed to have worsened the recession during the Great Depression.

“This shock far surpasses the 2018 tariffs in magnitude, diminishing the value of that ******* as a helpful guide for the economic impact ahead,” RBC chief economist Frances Donald and assistant chief economist Nathan Janzen said in a new report.

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“For context, in 2018, the U.S. average import tariff rose from 1.5% to roughly 3%. Under the new policy, the U.S. average tariff rate [rose] to nearly 11%, the highest average ratio since the 1940s.”

Could Canada avoid a recession?

Economists generally define a recession as two consecutive quarters of an economy contracting.

The RBC report said Canada could avoid a full-blown recession if the tariffs are in place for no more than a few weeks.

“Tariffs removed within a matter of weeks are likely to create a temporary stall for Canada. However, if they extend over a matter of months (e.g. 3-6 months), Canada’s recessionary risks increase rapidly,” the report said.

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1:54
Potential tarrif impacts on food prices

Tu Nguyen, economist at RSM Canada, said sustained U.S. tariffs and a response from Canada could likely see the ********* economy contract by two per cent – a sharp contrast to the projected 1.8 per cent growth rate for 2025.

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She said Canada could head into a recession, including job losses and inflation.

“[Tariffs and counter-tariffs] would also lift inflation from the current two per cent to a 2.7 per cent headline number, as some of the increased costs from tariffs are passed onto ********* consumers,” she said.

The RBC report said sustained tariffs would mean Canada could take up to three years to recover from the effects of a recession.

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“If sustained, our initial analysis suggests that tariffs of this size (based on many assumptions) could wipe out ********* growth for up to three years, with the largest impacts in the first and second years,” the report said.

The RBC report concurred with the Bank of Canada’s findings that a 25 per cent tariff applied across the board would reduce ********* GDP by 3.4 to 4.2 per cent.

********* manufacturing to take a hit

Nguyen said Canada will likely see lower demand for “all goods and services like new cars, dining out and entertainment.”

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The auto sector in the U.S., Canada and Mexico will be particularly hard hit, she said, losing out to competitors in Europe and Asia.

“The scenario in which economic damage is minimized is one in which a trade agreement is negotiated, putting an end to tariffs. The longer tariffs and retaliation continued, the more fractured and uncompetitive the three countries’ economies became — and the more economic pains consumers would feel from higher prices, fewer goods available and fewer jobs,” she said.

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0:34
********* sports fans boo U.S. national anthem in response to Trump tariffs

According to RBC, Canada’s manufacturing sector accounts for nine per cent of the total GDP and 70 per cent of total trade with the U.S.

“Canada’s manufacturing sector is most exposed, but the knock-on effects will also matter in many other indirectly exposed industries,” the report said.

The industry that could be hit the hardest is the auto manufacturing sector and in addition to job losses and slower economic growth, Canadians could face higher prices.

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“Prices of perishable goods such as fruits and vegetables are likely to jump as early as this coming week, given that they cannot be stockpiled in advance. Although the price of goods like appliances and cars would take longer to increase, they will inevitably rise,” Nguyen said.

The RBC report said the American economy, too, would feel the pain of Trump’s new policy.

American manufacturing businesses are likely to slow down and American consumers are likely to feel the burden on their pocketbooks.

“While the U.S. economy is starting from a relative place of strength (and is far less reliant on trade), it will face a shock large enough to adjust most forecasts downward on growth and upwards on inflation. Additional retaliatory policies from Canada and/or Mexico will likely exacerbate these impacts,” the report added.

Are you changing your spending habits, either to buy ********* or try to save more in case of hard economic times ahead? Email us at *****@*****.tld about how your spending is changing because of the tariffs, and we may be in touch for future stories.

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