“Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens.” — Donald Trump, Jan. 20, 2025   

As he took office for a second time, U.S. President Donald repeated his pledge to implement tariffs against Canada and Mexico.

Pau Pujolas, associate professor of economics at McMaster, recently co-authored a paper about how Canada should react, with Jack Rossbach from Georgetown University.

We asked Pujolas about the threat of tariffs, what it could mean for Canada, and how the country can respond and prepare for a trade war.

Before we dive in, just what exactly are tariffs, and what are trade wars? 

A trade war is an economic conflict between two nations in which each sets tariffs on the imported products from the other nation. A tariff is simply a tax on imports.

So if a U.S. company buys Canadian lumber, for example, the U.S. government adds the tariff on top and collects that money. This is known as “protectionism” because advocates of the policy say it protects manufacturers in the country that implements the tariffs.

In my view, however, this is misleading and serves to raise prices, which are ultimately passed to the consumers. Take, for instance, the construction industry. Houses need softwood lumber, which Canada has huge amounts of. The U.S. can’t produce all the lumber it needs domestically, so imports $8.4 billion worth of it.

However, we are in a trade war with the U.S. over lumber, which Canada is fighting in the courts. The U.S. has placed duties on lumber, which increase the price of building homes in the country. This is a taste of things to come if Trump’s aims to place tariffs on everything comes into effect.

Trump claimed in 2018 that trade wars are “easy to win.” How does economic evidence align with this perspective? Are there typically clear winners or mutual losses in trade wars? 

Until our research, the prevailing narrative was that there were only losers in a trade war. We show that way of thinking misses the point that trade deficits alter the payoff structure of a war.

The country with a trade deficit (ostensibly the U.S., in this case) may actually “win” in a trade war precisely because they are buying a lot more than they are selling back.

However, it’s bad news for Canada any way you look at it. Regardless of whether the U.S. economy ends up with a surplus or not from the trade war, the Canadian economy will suffer greatly.

The demand for Canadian exports will plummet and this will impoverish many working in those sectors affected by tariffs. Our economic models have shown that in the worst-case scenario for Canada, our economy will incur a 2 percentage-point decrease.

The U.S. economy will suffer, at least, in the sectors that depend on imports from Canada. At the end of the day the U.S. may have tiny gains caused by the much cheaper products they’ll buy from an impoverished Canada.

It may sound appealing, but being ahead by making neighbours poor is not a great idea.

What can Canada do to prepare for, or even retaliate to, tariffs?  

The first thing to do is to sit at a negotiating table and find solutions that avoid the conflict.

However, we should also take this as an opportunity to find ways to protect ourselves from tariffs, or at least to mitigate them.

And, in my mind, the best way to do this is to eliminate protectionism between provinces, which is very costly for the average Canadian. We should use this time of external threat to make sure we walk the steps for a unified market, a truly integrated country. The gains from doing that dwarf the costs from Trump’s aggression.

Economic analysis from Trevor Tombe and Lukas Albrecht in the Canadian Journal of Economics show that eliminating interprovincial trade costs would result in gains of between 3 and 7 per cent of GDP. This would more than mitigate the projected 2 per cent decrease that we predict could be caused by tariffs.

Simply put: In the face of Trump tariffs, Canada should be united.