Question

With the aid of an appropriate economic model(s) explain how the imposition of new tariffs on imports of Canadian goods in the US are likely to affect the demand for international (transborder) transportation.

Answer 1

The Trump administration has imposed and threatened several rounds of tariffs, and other countries have responded to these measures. Using the Tax Foundation Taxes and Growth Model, we can analyze the effects of imposed, threatened, and retaliatory tariffs on the United States economy. Tariffs damage economic well-being, and lead to a net loss in production and jobs, and lower levels of income.

According to the Tax Foundation model, the tariffs planned and imposed so far by the Trump administration would reduce long-run GDP by 0.20 percent ($50.31 billion) and wages by 0.13 percent and eliminate 155,878 full-time equivalent jobs. If the Trump administration acts on threats to place new tariffs on automobiles and parts, additional tariffs on products from China, and tariffs on products from Mexico, GDP would fall by an additional 0.50 percent ($124.82 billion), resulting in 0.33 percent lower wages and 387,041 fewer full-time equivalent jobs.

Other countries have announced intentions to impose tariffs on U.S. exports. If these tariffs are fully imposed, we estimate that U.S. GDP would fall another 0.09 percent ($21.53 billion) and cost an additional 66,725 full-time equivalent jobs.

If all tariffs announced thus far were fully imposed, U.S. GDP would fall by 0.79 percent ($196.66 billion) in the long run, effectively offsetting about half of the long-run impact of the Tax Cuts and Jobs Act. Wages would fall by 0.51 percent and employment would fall by 609,644 full-time equivalent jobs.

Economists generally agree that free trade increases the level of economic output and income, and conversely, that trade barriers reduce economic output and income. Historical evidence shows that tariffs raise prices and reduce available quantities of goods and services for U.S. businesses and consumers, which results in lower income, reduced employment, and lower economic output.

Tariffs could reduce U.S. output through a few channels. One possibility is that a tariff may be passed on to producers and consumers in the form of higher prices. Tariffs can raise the cost of parts and materials, which would raise the price of goods using those inputs and reduce private sector output. This would result in lower incomes for both owners of capital and workers. Similarly, higher consumer prices due to tariffs would reduce the after-tax value of both labor and capital income. Because these higher prices would reduce the return to labor and capital, they would incentivize Americans to work and invest less, leading to lower output.

Alternatively, the U.S. dollar may appreciate in response to tariffs, offsetting the potential price increase on U.S. consumers. However, the more valuable dollar would make it more difficult for exporters to sell their goods on the global market, resulting in lower revenues for exporters. This would also result in lower U.S. output and incomes for both workers and owners of capital, reducing incentives for work and investment, and leading to a smaller economy.

In May 2019, President Trump announced that the U.S. was lifting tariffs on steel and aluminum on Canada and Mexico

Canada’s steel and aluminum industries are key contributors to the Canadian economy, providing well-paying jobs and key inputs for other major industries, including energy, advanced manufacturing, construction, and auto-making.

The Canadian steel industry employs more than 23,000 Canadians and contributes $4.2 billion to Canada’s gross domestic product (GDP). The Canadian aluminum industry employs 10,500 workers while contributing $4.7 billion to Canada’s GDP.

The Canadian and U.S. steel and aluminum industries are deeply integrated, and underpin continental supply chains that strengthen the global competitiveness of the North American economy. Canada is a longstanding safe and secure supplier of steel and aluminum to the U.S. defence industry.

Canada buys more American steel than any other country in the world, accounting for 49% of U.S. exports in 2018. In 2018, over $13 billion of steel was traded between Canada and the United States.

On aluminum, Canada and the U.S. share a highly integrated market with combined trade of $14.5 billion annually. About 76% of Canada’s primary aluminum production is exported to the United States, where it is used as an important input for further processing into products for U.S. domestic and export markets.

On May 31, 2018, the United States announced that tariffs of 25% on imports of Canadian steel and 10% on imports of Canadian aluminum would take effect on June 1, 2018.

On May 31, 2018, in response to the unprecedented tariffs, Canada announced its intention to impose on July 1, 2018 surtaxes or similar trade-restrictive countermeasures on up to $16.6 billion in imports of steel, aluminum and other products from the United States, representing the value of 2017 Canadian exports affected by the U.S. measures.

On May 17, 2019, Canada and the United States reached an understanding on Section 232 tariffs on steel and aluminum to eliminate all tariffs the United States imposed under Section 232 on Canadian imports of steel and aluminum, and all tariffs Canada imposed in retaliation for the Section 232 action taken by the United States

Several countries have announced plans to impose tariffs in response to the U.S. tariffs on steel and aluminum. The tariffs target American products such as denim, bourbon, whiskey, and agricultural commodities, for an estimated total tax of $30.05 billion. More countries are considering imposing retaliatory tariffs on the United States, but have not announced details; this includes Japan.

In response to the tariffs on steel and aluminum, China announced tariffs on about $3 billion worth of American products, including a 15 percent tariff on 120 products, such as wine, nuts, and steel pipes, and a 25 percent tariff on 8 other products such as recycled aluminum and pork. These tariffs on various products amount to $600 million. And in response to the Trump administration’s tariffs on $50 billion worth of imports, China responded in kind, raising tariffs on U.S. products by $12.5 billion.

In response to the tariffs on steel and aluminum, Mexico announced a tariff of 25 percent on products like cheese, steel, and Tennessee whiskey, and a 20 percent tariff on goods like pork, apples, and potatoes. The value of imports subject to these tariffs is $3 billion

Canada published two tables of goods to be subject to a 25 percent tariff and 10 percent tariff, representing the value of Canadian goods subject to the steel and aluminum tariffs, or about $12.8 billion.

In May 2019, in response to the U.S. lifting tariffs on Canada, Canada announced that it was lifting its own retaliatory tariffs on the U.S., reducing Canadian tariff revenue by approximately $2.1 billion. This $2.1 billion is no longer included in the $30.05 billion in tariffs imposed on the U.S. by other nations.