Weighing in on the incoming Canada-US trade war. Retaliatory tariffs are self-immolation. The entire country seems to be cheering as we walk off the edge of a cliff.
I: Not economically a good idea
1. Tit-for-tat is not game theory optimal in large country vs small country. The US economy is 12.5x the size of Canada's. The default outcome is that the large country bleeds out the small country.
2. In every single classical trade model, tit-for-tat tariffs means the small economy consumers and producers lose much more than the large economy's. The large economy feels less impact due to it being a smaller % of total trade AND it has more domestic producers to substitute from.
3. Canada has the highest household debt in the G7, the worst per capita growth since 2015 in the G7. It's already on the brink of recession. A protracted trade war + money printer won't be a recession, it will be a depression.
Economics aside: Canada is not in a position to retaliate
1. The truth is that Canada has very few allies or economic partners in this. The time to make friends and diversify was years ago, not today. Going into a trade war alone against the 500-lb gorilla is asking to get mauled.
2. Very important: Since we are in uncharted territory, The US has nuclear economic options that we don't even talk about. It can sanction Canadian banks (recall TD was recently fined $3b for laundering drug money), effectively cutting us off from the global money markets. POTUS can issue an EO banning American banks from holding CAD for national security reasons.
Ask any Iranian, Cuban, Russian what it feels like to be cut off from the global system completely by Pax Americana.
