The recent spike in protectionist U.S. policy is reminiscent of the events leading up to the Great Depression and the Second World War, but with the potential for a more severe economic downturn, a McMaster expert says.  

The highly interconnected global economy stands to suffer even more now, says economist Pau Pujolas, whose recent research draws parallels between contemporary events and those in the 1920s and ‘30s.  

Pujolas shares insights on the current situation, as well strategies that could avoid the worst-case scenario and help Canada emerge in a stronger financial position. 

Your paper looks at what we can learn from the trade policies of the past. What did you find and how would similar policies affect today’s economy?  

This paper was motivated by the rise of nativism and xenophobia, which has led to a growing dislike for global trade. This trend started strongly in Europe, where right-wing populism has been gaining ground.

As an economist, I know that trade makes goods cheaper and improves our economic well-being. Protectionist policies make us poorer. We’ve seen this before in the 1930s with the Smoot-Hawley Act, which worsened the Great Depression by causing global economic collapse and poverty.  

Today, our economy is more interconnected than ever. But the economy today also looks different than it did in 1930, with a significant portion of value coming from services rather than manufacturing and agriculture. In the paper we ask how a disruption like the one in the 1930s would affect our economies today.   

Using modern tools and historical data, we find that a trade disruption today like in the 1930s would be much more costly, about three to four times worse, because of our increased reliance on international trade.

Disrupting trade will increase costs, reduced capital (which we are seeing now with the crash in the stock market), job losses, and widespread economic hardship. 

Is there any way out for Canada or are we doomed to suffer the consequences of whatever Trump decides?  

Canada can mitigate the impact of tariffs and come out of it with a strengthened economy. 

First and foremost, we should eliminate trade barriers between provinces. This idea is gaining public support, and it’s important to encourage trade within Canada.

Even though the First Ministers of Canada make statements claiming to eliminate internal trade barriers, they still insist on excluding food. Are Albertans’ stomachs different than that of Nova Scotians? Is Ontario produce not good enough for B.C. folks? Our premiers still insist on keeping barriers. They fail to understand the urgency of the situation. 

Second, we need to take our trade deals with our partners more seriously. Currently, the Canada-EU free trade agreement has many restrictions, preventing us from accessing affordable European goods like wine from Priorat, French cheese, or Iberian ham.

We should aim for true free trade agreements without these harmful clauses with the EU, the United Kingdom, Japan, Korea, Australia … especially as we see the U.S. stepping back from such deals. Moreover, our renewed trade agreements should penalize any attempts to block trade. 

Research shows that removing interprovincial trade barriers could offset the costs of tariffs imposed by the U.S. and even improve our economy.

The trade war with the U.S. might cost us 2 per cent of GDP, but removing internal barriers could add 4 per cent to our GDP. A serious free trade agreement with the developed world could further boost our GDP by 0.2 per cent. 

What do you think of Canada’s response to the tariffs?  

I don’t think dollar-for-dollar tariffs in response to U.S. tariffs is a good strategy.

Essentially, if the U.S. imposes tariffs on Canadian products, it hurts American consumers by making goods more expensive. For example, a producer in Windsor might find it harder to sell products to Michigan, but the primary burden falls on American buyers who face higher prices.

We should ensure that those affected in Canada are compensated, but responding with dollar-for-dollar tariffs means we would be imposing similar costs on Canadians.  

It’s like having a friend who is hurting themselves, and instead of helping, we decide to hurt ourselves too. This approach doesn’t solve the problem, it only exacerbates it.

Instead of retaliating — which only harms our own economy — we should focus on finding constructive solutions that protect Canadian interests without self-inflicting damage. 

How should Canada approach trade relations with the U.S. in light of all this tariff talk?  

We need to understand that we are not entitled to American consumers. If the U.S. decides to impose tariffs or even build a wall, it’s their choice, even if it’s not in their best interest. We can advise them against it, but ultimately, it’s their decision. 

 But we must ensure that any trade deals we sign are clear and reliable. If a new POTUS can easily change what we had agreed on, it means our agreement wasn’t very good to start. We need to be clear about what we are signing to avoid future misunderstandings and poor decisions.