By BDC
Donald Trump’s policy agenda for a second term includes several key proposals that build on his previous presidency and his 2024 campaign promises. Here are some of the main points that could have an impact on Canada’s economy and why they matter for entrepreneurs as we move into the new year.
- Tax cuts
Trump proposes to enact large new tax cuts for workers and aims to make permanent individual and estate tax cuts from the 2018 Tax Cuts and Jobs Act. Tax cuts, aimed at households and corporations, would increase consumer spending and business investment, both contributing to higher growth in the US, which tends to support growth in Canada by raising demand for our exports.
However, if the US reduces corporate taxes significantly, Canada might lose its competitive edge in attracting businesses and investments. A tax cut would also likely boost equity values and have spillover effects to other countries including Canada by increasing the wealth of investors.
- Tariffs
Trump has said he plans to impose a universal baseline tariff on all US imports of 10 percent and a 60 percent tariff on imports from China. Those tariffs would disrupt trade not just for Canada but globally. Tariffs imposed on Canadian exports could be negotiated and exceptions granted, given the tight supply chain integration between the two countries. Nevertheless, slower global economic growth and higher prices for Canadian exports into the US would reduce demand for Canadian goods and exporters would feel the pinch.
Back in July, we estimated that a 10 percent tariff on exports to the US would subtract $7 billion from Canadian GDP in the year of implementation, representing a 0.3 percent decline from the base scenario. This drop-in economic activity would translate into the loss of around 20,000 jobs in Canada.
Such measures would not only lower global trade and therefore global GDP growth, but they would also likely lead to higher inflation in the US. This could force the Federal Reserve to keep interest rates elevated.
A slower economy in Canada and the differential between the interest rate policies of the Bank of Canada and the Federal Reserve have already led to a depreciation in the loonie this year.
Although a low Canadian dollar tends to support exports by making Canadian goods less expensive in the US, tariffs would counteract that advantage. Moreover, a further drop in our exchange rate would hurt the purchasing power of Canadian households and businesses outside the country. The strength of the US dollar elsewhere would also lower demand for goods traded on the international markets because they are typically priced in US dollars.
- Energy production
Trump wants the US to become the dominant energy producer in the world by increasing drilling and energy production. This could have an impact on the Canadian oil sector, but experts suggest Canada could well be spared any punitive action.
During his first mandate as president, Trump didn’t impose tariffs on the energy trade with Canada. That wasn’t the case for other intermediate goods such as steel and aluminum imports. In another sign the incoming administration might take a hands-off approach to Canadian energy, Trump backed the cancelled Keystone XL pipeline expansion, which would have shipped more western Canadian crude into the United States.
The impact on the energy market is likely to be felt more on a global stage. Increased oil activity and production in the US would likely push prices down at a time when demand worldwide is weak. Moreover, 60 percent tariffs on Chinese imports would hurt the world’s No.1 oil importer, further tempering demand.
The impact in a nutshell
If all the policies proposed by Trump during the 2024 campaign came into effect, they would have a mixed impact on Canada’s economy. Some would stimulate growth on both sides of the border while others would dampen trade and have negative spillover effects.
- Tax cuts would spur business investment and consumer spending south of the board. The spillover effects would be positive for Canada if Americans buy more and visit more, but lower US taxes could also reduce Canada’s business competitiveness.
- Imposing tariffs on all US imports, including much greater ones on Chinese goods, would disrupt global trade, reduce demand for Canadian goods and add pressure on prices in the US, restraining the Fed’s ability to cut interest rates.
- Trump’s plan to increase US energy production could lower oil prices and impact the Canadian oil sector; however, Canadian energy could very well be exempted from tariffs.
