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A 25% auto tariff from Donald Trump could send Ontario into recession: economists

WATCH: What is a trade war? How do tariffs work?

If U.S. President Donald Trump enacts a 25 per cent tariff on Canadian-made automobiles, it could send Ontario into recession.

That’s according to BMO economist Sal Guatieri.

“By our estimates, that could slow Canada’s economy by a good one per cent, possibly more. And of course, most of that impact would hit hard in Ontario, which is the province that accounts for most Canadian auto production,” he said.

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READ MORE: Responding to Trump auto tariffs in kind would have ‘catastrophic’ consequences: report

Ontario is particularly hard hit because its economy is so tied to the auto industry: Guatieri said over 85 per cent of cars made in Canada go to the U.S. and shipments of autos and parts to the U.S. account for about 30 per cent of Ontario’s exports.

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WATCH: Trump says trade deal with Canada will be next priority after Mexico

Trump says trade deal with Canada will be next priority after Mexico
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Trump has renewed calls for auto tariffs as U.S. and Canadian officials continue to vie for a NAFTA deal in Washington.

Last week, Trump said the easiest way to get Canada to agree to a deal would be to enact tariffs on the auto industry.

“I think with Canada, frankly, the easiest thing we can do is to tariff their cars coming in,” he said when announcing a deal between the U.S. and Mexico.

READ MORE: Trump says Canada-NAFTA negotiations ‘totally on our terms,’ report says

“Every time we have a problem with a point, I just put up a picture of a Chevrolet Impala,” Trump also said in off-the-record comments, according to the Toronto Star. (The Impala is made by General Motors in Oshawa, Ont.)

Prime Minister Justin Trudeau has promised to protect autoworkers, and Foreign Minister Chrystia Freeland returned to Washington Wednesday to resume trade talks.

WATCH: Trudeau says government will defend auto workers as possible tariffs loom amid NAFTA negotiations

Trudeau says government will defend auto workers as possible tariffs loom amid NAFTA negotiations
Trudeau says government will defend auto workers as possible tariffs loom amid NAFTA negotiations

Canadian and American trade lawyer Mark Warner says it’s unlikely that Trump is bluffing, and he will enact his threat if NAFTA or a new trilateral deal doesn’t go through.

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He warns that Canada hasn’t seen a significant impact from Trump’s previous tariffs on steel and aluminum, but that won’t be the case for auto tariffs.

“A lot of what we trade with the United States is auto-related, a huge part,” Warner said. “And it seems to me that we would feel that hit a 25 per cent tariff.”

While the impact to Canada will be severe, Guatieri says Ontario could see twice the damage, up to a two per cent hit to its GDP.

“Given that the underlying (predicted) growth for Ontario of next year is about two per cent, that would seriously risk a recession for the province,” he said.

Other assessments are also dire: a CIBC report from June says that if Canada, and no other country, is hit with auto tariffs, that could mean a 40 per cent drop in automobile production in Canada.

READ MORE: Auto tariffs could cut Canadian production by almost 1 million cars, CIBC says

BMO economists said 25 per cent tariffs on all countries would make the price of cars in the U.S. increase by 15-20 per cent, meaning the reduction of Canadian-made vehicles in the U.S. could drop by 10 per cent.

A TD analysis found that “significant job losses also occur — up to one in five Ontario manufacturing jobs could be at risk.”

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Warner said he would make the NAFTA deal as quickly as possible.

READ MORE: What is Chapter 19? The dispute resolution mechanism at the heart of NAFTA talks

If concessions on dairy supply management and Chapter 19 are the only thing that is standing in the way of a new trade deal, Warner said Canada should remove the threat of 25 per cent auto tariffs.

“I say make those concessions because the threat to our economy and the auto industry is just too great.”

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A bad NAFTA deal could also reduce business development in Canada and Ontario, Guatieri said.

“Without a NAFTA deal, it could undermine business investment for some time,” Guatieri said. “Right now business investment is kind of pacing our economic expansion and exports. We don’t want to lose business investment.”

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