Trump's tariff flip-flops and potential effects on Canada's economic growth

Abstract

This study attempts to forecast the potential economic growth effect of President Trump's tariff measures on the Canadian economy. To achieve this objective, it undertook a series of analytical procedures ranging from econometric estimations to model simulation. Econometric estimates (Dynamic ARDL) indicate that Canada's exports to the USA affect its economic growth. Findings were robust from DOLS estimation. Toda Yamamoto causality tests confirmed causal connectedness between them. The International Trade Closeness model shows that despite losing trade flexibility during the former Trump administration, Canadian exports to the United States were not significantly affected. Results from the Forest Simulation method provide predictions of response to tariffs on Canadian exports to the USA across multiple potential tariff scenarios ranging from 15% to 50%. Under a minimum 15% tariff rate, total exports are likely to be the highest at 58.91 units. However, if US tariffs on Canadian exports keep rising, exports are expected to decline steadily across all categories, with total exports likely to fall to 34.65 units under a 50% tariff. Canada’s retaliatory move on its imports from the USA is expected to impact its economy. A 40% tariff is expected to lead to a nearly 30% contraction in import volume. Policy implications and recommendations are discussed.