Back in history class, did you ever wonder what people back then thought when they lived through the end of one of those eras the teacher kept going on about?
Well, if we end up with big new U.S. tariffs on Canadian goods after the month-long reprieve President Trump gave us on Monday, you may live through one yourself: the end of the free trade era. And your wallet isn’t going to like it.
Ever since the end of World War Two, we’ve lived in a remarkable period of economic openness. Led by the United States, the post-war era saw tariffs fall. Trade surged. So did cross-border investment. For Canada, it culminated with free trade with the United States in 1988, which completed our transition from the British Empire and “Imperial trade preference” to an economic partnership with our American allies and friends.
The era was far from perfect. But most economists will tell you that free trade played a big role in the remarkable rise in living standards since 1945. Canada’s economic output per person, for example, has more than quadrupled over that period.
Even today’s most grizzled sourdoughs were just kids before then. Back in the 1930s, the infamous American Smoot-Hawley Act devastated Canadian industries. According to a paper by Judith McDonald and colleagues, U.S. tariffs on saw and planing mill products went from zero to $1.00 per thousand board feet. Two years later Canadian lumber exports were down 34 per cent. Cattle exports went down 84 per cent and milk 65 per cent.
The economic mayhem this caused in Canada is one reason why, when you help an oldtimer from this era clean out their shed at the cabin, you find things like old nails carefully hammered straight to be reused.
Last Saturday, before the reprieve two days later, the new U.S. administration announced large tariffs on Canada. Most of our exports would go from zero tariffs under free trade to 25 per cent. This is a lot, considering that last year the weighted average U.S. tariff on the entire world was under three per cent.
The papers Outside have filled your phones with stories about the impact on the Canadian economy.
But what about the Yukon? Let’s look at five ways the end of free trade would affect Yukoners, if it actually happens.
First, U.S. tariffs will hurt Yukon exporters. A lot. Think of a Yukon firm producing snowmobile skimmers for the Alaskan market. Suppose that, last week, the going price in Alaska for skimmers was $1,000 CAD and that our Yukon firm was selling them and making a decent profit after shipping costs. Now there is a 25 per cent tariff, which is essentially an import sales tax.
Now the Alaskan buyer has to pay 25 per cent or $250 to import the skimmer, making the total cost $1,250. Since they can buy a competing Alaskan skimmer for $1,000, they will tell the Yukon firm to reduce its price to $800 or they won’t buy.
The Yukoners will have to eat the tariff or lose the business.
The thing that cushions this blow for the Yukon economy overall, if not individual exporters, is that our private sector is so small we don’t actually have many exporters.
Yukon Statistics Bureau data on our balance of trade in 2021, the latest year available, shows that the Yukon exported $244 million internationally. That sounds like a lot, but was only seven per cent of our economy. Over 30 per cent of the overall Canadian economy is based on exports. And since 65 per cent of the Yukon’s exports that year were copper, lead and zinc, most of those exports have already dried up thanks to mine closures.
Nonetheless, small Yukon exporters targeting U.S. customers will be hit hard.
Second, the retaliatory tariffs Canada puts on U.S. goods will flow through to prices in Yukon stores. So will the tariff-induced weakness in the Canadian dollar, which hit a 22-year low of 67.6 cents USD before news of the reprieve arrived. This will make your next iPhone or litre of Florida orange juice that much more expensive when you buy it in Canadian dollars.
Unless you switch to Canadian or other non-U.S. products.
Third, if the U.S. retaliates against Canadian retaliation, we may get into an escalating trade war. If so, Canada has so-called “non-tariff” measures planned. While not known publicly, these could include export limits on Yukon minerals. Or taxes on U.S. digital giants. B.C. Premier Eby even mused about shutting the Alaska Highway to U.S. traffic.
Fourth, the weaker dollar may benefit some Yukoners. We may see more tourism from Canadians, plus Americans whose strong dollar will buy more Yukon vacation. Yukoners who export services to the United States, like coding or freelance writing, will benefit if they are paid in U.S. dollars.
Those four effects will hit pretty quickly. The exchange rate responds instantly to what market participants think is going to happen. Some stores may raise prices immediately, or they may wait a few weeks until new inventory comes in.
And while those effects will impact the Yukon economy overall, and be devastating for some individuals, they are unlikely to cause a major economic crisis here. That’s because so much of our economy is based on government spending.
However, that gets us to our fifth effect: how an economic shock to the southern Canadian economy can flow through via the transfer payment into the Yukon economy.
Economists are desperately trying to model how U.S. tariffs will affect the Canadian economy. It depends a lot on unknowns, like how strongly the Canadian government retaliates and how much the loonie falls in the long run. But the estimates have been worrying. The Bank of Canada, for example, estimated a four per cent hit over four years.
That’s about as bad as the 2008 financial crisis, although not as bad as the recession in the early 1980s when interest rates were over 20 per cent.
The Canadian government will make some extra revenue from retaliatory tariffs, but will also pay out big bucks supporting hard-hit Canadian workers and companies. If Ottawa needs to economize by tightening up the transfer payment, we will feel it. It’s impossible to forecast if or when this will happen or by how much.
The final unknown is whether this really is the end of an era. Maybe the United States and Canada, after a lot of noise, will agree on a new version of their free trade deal as they did in 2018. But maybe they won’t. In that case, you and your wallet may be able to bore future history classes with your reminiscences of the free-trade era.
Keith Halliday is a Yukon economist and the winner of the 2022 Canadian Community Newspaper Award for Outstanding Columnist. His most recent book Moonshadows, a Yukon-noir thriller, is available in Yukon bookstores.
