Trump's Tariffs Will Hurt the Middle-class
If your biggest trading partner punches itself in the face should you follow suit?
This week on the Missing Middle Podcast Sabrina Maddeaux and Mike Moffatt delve into the complexities of tariffs, particularly in the context of the 25% tax the new Trump administration is threatening on all goods imported from Canada to the US. Mike and Sabrina explore what exactly tariffs are, their implications for the middle class in both the US and Canada, and the public's understanding of these taxes. The conversation highlights Trump's misplaced anxiety surrounding trade deficits and the potential economic fallout for consumers and businesses if the tariffs are implemented. Mike and Sabrina also discuss how tariffs act as hidden consumer taxes, the potential retaliatory measures Canada could take, and the political motivations behind the trade tensions.
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Below is an AI-generated transcript of the Missing Middle podcast which has been lightly edited.
Sabrina Maddeaux: We're recording this on January 17th, just a few days before the inauguration of Donald Trump. The incoming president has threatened Canada with a 25 % across-the-board tariff on goods it imports from Canada and Mexico and adding another 10 % on goods imported from China. This raises the obvious question, what exactly is a tariff and how does it impact people?
Mike Moffatt: Yeah, so basically a tariff is an import tax where if you are importing a good from another country, the importer has to pay a tax on that, which is usually a percentage of the value of the good or the price. These things tend to be very complicated because different goods can have different tariffs associated with them. So, you know, one good could be a 3 % tariff and one could be a 20 % tariff.
So figuring that out, like every good has a different tax on it. So first of all, figuring out how to classify a good is challenging. And then secondly, this like, where is the good from? It's not actually like which border it crosses, but it's actually based on where the good is made. And this becomes really challenging because you can have something like a car that might have parts from like 20 different countries. So there's this whole rules of origin mess to figure out like when is something a made-in-Canada car versus a made-in-Korea car, versus something else. So it's a huge, really complicated system. But at the core, it is basically just a tax that is paid for by the importer when you bring a good into a country.
So now we've gotten that out of the way. Let's talk about the effects of it. So Yale's budget lab has estimated that Trump's tariff will raise prices costing US families between $1,900 and $7,600 a year, depending on their income level and what exactly Trump does here. Needless to say the vast majority of people in my profession, economists, think this is outright madness. Now, Sabrina, you're more in tune with the general public than I am. So how do you think this is playing out with the general public on both sides of the border?
Sabrina Maddeaux: I think it's a bit different on both sides of the border. I think in the US there still isn't - well I think on both sides - there still isn't a real understanding, like you said, of what tariffs are and how they actually work. It's really a complex subject that your average person hasn't probably thought about ever or since they were reading a high school or university textbook. In the States, there's so much political noise right now leading up to Trump's inauguration that there's this awareness that there's been threats made against Canada and Mexico and other countries.
But in terms of the nitty-gritty, I don't think there's a realization of the actual potential economic implications. Now in Canada, there's a lot more anxiety surrounding this. Obviously, we're already in a state of economic turmoil, whether it's coming out of the pandemic and we're still dealing with the effects of inflation, the housing crisis, groceries, cost of living, and now add one more potential thing. And even if people don't understand the real ins and outs of tariffs, they know that this might be really bad economic news. So there's anxiety there and a real demand that politicians address this and get ahead of it. And that's why they're feeling so much pressure, both federally and provincially to do so. There's also been a real surge of patriotism. You see it on social media, that just a few years ago, we were talking about being - well, especially the Liberals were talking about being post-national and moving forward in that way. And suddenly we're back to realizing how important it is to stand up for Canada and that maybe we're taking a few things for granted and we need to be a bit tougher when it comes to even negotiating with our allies like the United States.
But I want to move to talk about what's really going on here with Trump's terror threats.
He's throwing out a couple of different reasons. So first he's pointing fingers at Canada saying we need to crack down on illegal border crossings and drugs supposedly flowing into the US from us. But what seems to be really annoying him is this 40 billion dollar trade deficit with Canada. In plain English, that means Americans are buying 40 billion dollars more stuff from Canada than Canadians are buying from the US. And Trump's basically saying, hey, Canada, you need us way more than we need you.
But Mike, is it really that straightforward? Can you break that down a bit more?
Mike Moffatt: Yeah, no, this idea that it means that one country needs another country more than another just doesn't make sense. So we have to understand with the balance of trade that globally it has to balance out, right? For every country that runs a trade surplus, another one has to run a trade deficit simply because global trade has to balance until we start trading with Martians or whoever.
And if you bring it down to a personal level, you know, I run a large trade deficit with the grocery store, right? I sell them absolutely nothing and I buy a lot from them. Similarly, you know, I'm employed by the University of Ottawa and I run a big trade surplus with them. I don't buy anything from the University of Ottawa, except maybe the occasional Starbucks cup of coffee. But, you know, I sell my labour to them.
Neither one of those means that, you know, I don't need the University of Ottawa. Clearly, I do because they're paying me, but it also doesn't mean that like, I don't need the grocery store, even though I'm running a significant trade deficit with them. So I think that's how we have to look at things and just understand that, you know, people both need to sell things and need to buy things. And these aren't necessarily always going to balance out, particularly in any kind of bilateral relationship. That you will have trade deficits with some organizations and trade surpluses with others. And you know, that's that's okay.
Sabrina Maddeaux: Absolutely. That's a great way of putting it. But it seems like if Trump were to enact a 25 % tariff on all goods from Canada and Mexico this would hurt middle-class Americans, many of whom voted for Trump in the first place. Is that correct?
Mike Moffatt: Yeah, it would, I think it would hurt the majority of them. I think, you know, the folks in that middle class may support them for a variety of reasons that one, might think that because, you know, that foreigners are basically paying this tax, it's not, it's the importer, but they kind of think foreigners do, which means that, okay, well, if they're going to pay my tax bill, then maybe my income tax will go down or, you know, maybe government can start cutting other taxes.
And there's also a belief that these tariffs are going to create a lot of jobs and they might in some sectors with some offsetting losses in others. But yeah, I think these things are going to hurt the middle class in general more than they help. And again, I think there are some kind of mistaken beliefs among the American public about, you know, who pays for these tariffs and their economic impact.
Sabrina Maddeaux: So Mike, you touched on this a bit, but like you said, there's a lot of confusion surrounding this, so I want to drill down. Economists like yourself keep telling us that we, the consumers, end up paying more when tariffs kick in. It's like a hidden tax that shows up in our shopping cart. But if that's true if American shoppers are the ones getting hit with higher prices if this goes through, then why are Canadian businesses freaking out about these tariffs? What's got them so worried if they're just going to be passing the cost down?
Mike Moffatt: Yeah, this is a great question and kind of shows how sort of complicated the dynamics are here that it is absolutely true that the American importer pays these tariffs and that could be a tariff on a car built in Southwestern Ontario or a barrel of crude oil from Alberta or some lumber from British Columbia. But, you know, because those prices are now higher in the United States,
American consumers and American businesses are going to buy less of those goods. So that's going to be difficult for these companies. Perhaps the Canadian companies may respond, try and get some of that market share back by lowering prices. That's certainly part of the hope of the Trump administration. I think the bigger hope of the Trump administration is that those consumers and businesses will buy American goods instead of Canadian goods.
I think that's largely unrealistic, you know, because it takes a long time to, you know, rejig supply chains and, you know, really kind of ramp these things up and there's all kinds of capacity issues. I think what's more likely to happen is that American companies and businesses, instead of buying goods produced in Canada, they might buy goods produced in Australia or the UK. Or, because prices are higher, they're just going to buy fewer goods.
But overall, the impact is going to be fewer cars and barrels of crude oil sold from Canada to the United States. And there's going to be some squeezes on profit margins as well. So it's certainly not good for Canadian businesses.
Sabrina Maddeaux: Now, how would these tariffs and the broader trade war that Trump is threatening to launch affect the Canadian middle class?
Mike Moffatt: Largely through jobs, largely, you know, again, go, go to these examples where if Americans aren't buying as many cars manufactured in Southwestern Ontario, you know, that's not good for the assembly plants and all the sort of tier one and tier two parts manufacturers across the supply chain. You know, if we're not selling as much oil to the Americans, that's not good for, for workers in Alberta.
And then we also have to realize that Canada may respond in kind and that can create some challenges for Canadian businesses and consumers.
Sabrina Maddeaux: So if Trump does impose a 25 % tariff on all Canadian goods, what measures could Canada actually take to retaliate? I know many things have been proposed, including disrupting energy that the US uses to power their manufacturing and cities.
Mike Moffatt: Yeah, we should remember that this isn't our first rodeo with this, that Trump did this back in his first administration with steel and aluminum and a number of other things. Canada retaliated by putting our own tariffs on American-made goods. So things like orange juice, right? That we don't produce up here. We could put a tariff on it.
That certainly doesn't help middle-class consumers. My daughter is going to be upset if we're not buying as much orange juice because that's one of her favourites. So that's going to be challenging for us. Obviously, as mentioned, we can do things on the energy file.
The American government has a massive debt. So there are ideas out there that maybe Canadian pension funds and other Canadian investors will buy less of that debt, which might cause American interest rates to be higher than they otherwise would. We do have instruments that we can use. It's a bit of a challenge because they're so much bigger than we are that their tariffs probably hurt us more than we hurt them. And these tariffs have impacts in Canada as well, right?
People often joke, or economists joke, you've got one country saying “I'm going to keep punching myself in the face.” And the other country goes, “Oh yeah, well, if you're punching yourself in the face, we're going to respond by punching ourselves in the face!”
So, you know, it's ultimately challenging, right? That any tool that you use - the country ends up paying a price as well.
Sabrina Maddeaux: Well, based on that, I have a feeling what your answer might be, but do you see any way in which a U.S./Canada trade war might actually benefit Canada?
Mike Moffatt: Yeah, I think I kind of signalled where I was going with this, you know, is repeatedly punching yourself in the face, a good thing? And the answer is no, that really nobody wins a trade war. Right? So I think the only way that this benefits Canada is through some kind of, I don't know, weird butterfly effect or something. You notice we're getting - Canadians are getting a little more patriotic. You know, we saw recently a team Canada-type approach where all but one premier was kind of involved. You had Wab Kanu, the NDP premier of Manitoba and Doug Ford, the Conservative premier of Ontario, you know, looking like BFFs and really kind of complimenting each other. Maybe this brings us together, maybe it causes us to examine how we can be more productive as a country.
I know there are thoughts out there that this might spur us to reduce internal trade barriers. I don't really buy that. I mean, these barriers have survived two world wars, a great depression and several recessions. I don't know if they're going anywhere, but, you know, that, that might happen. So there may be some beneficial side effects, kind of butterfly effect type side effects, but overall, I would say at the end of the day, nobody, nobody wins a trade war.
Sabrina Maddeaux: Well, I think the biggest thing there is it's only people like us talking about internal trade barriers. I've yet to hear anyone with the power to actually remove or diminish those, actually bring it up as a solution.
Mike Moffatt: Yeah, absolutely. I don't think the general public, you know, has spent too much time thinking about, you know, truck width regulation differences between Manitoba and Saskatchewan. But, you know, it's possible. We’ll have to see where this goes.
Now I've been focusing on the economics of this and you've been asking me questions about the economics. I'd like to ask you about the politics of this. We're seeing politicians on both sides of the border using this trade tension for their own messaging. In your view, how much of this tariff threat is actually about trade policy and how much of this is a political theatre on frankly both sides of the border?
Sabrina Maddeaux: I think it's a bit of both. I think that on the southern border in the US, Trump has obviously signalled he believes in tariffs, he likes tariffs as a solution, even if perhaps he doesn't understand all the consequences of actually enacting them. But at the same time, he is using aggression towards Canada on the tariff front or aggression towards Greenland as I think a little bit of a distraction for some of the domestic issues in the States that he might not have a great idea on how to tackle coming into office when there's really high expectations from his base on things like lowering grocery prices, housing prices. And this is a great way to have the news cycle focus on different things. At the same time, he's still going through some legal troubles in the background. There are some very controversial confirmation hearings going on. So this has really flipped the news cycle and he's a master of the media. So if he can focus people outside of US borders rather than within them and sow chaos elsewhere, he's absolutely going to do that. And he's quite frankly good at it.
On the Canadian side, politicians are taking it seriously because it is a very real economic threat like we've discussed. But as always in politics, that doesn't mean there aren't other benefits or opportunities for people. I think especially for the Premiers, when you have some Premiers who might be thinking about if they have a chance at a federal political career later on down the road, or maybe what they want to do after their Premiers if they want to go back into media or punditry, this is an opportunity for them to get not only national media coverage and name recognition, but international in the States. We see a lot of them going on, whether it's CNN or Fox News. And while that comms strategy is important, it's also benefiting them in certain ways. You have Doug Ford out there this week with his Canada's not-for-sale hat that got memed around the internet. So certainly this is playing into some of their own political agendas.
And we might have an announcement coming up from Christia Freeland about announcing her liberal leadership run. And the rumour has been reported by media that her first big policy proposal will be like-for-like retaliation on any tariffs. And I think that's interesting as well because rather than announcing with a more domestic-focused issue, whether it's a crisis like immigration or housing or healthcare, she is going the America route. So maybe that's avoiding talking about some policy areas where the liberals haven't been quite so strong and hopping on this very of-the-moment new story. So it'll be something to watch for sure.
Mike Moffatt: Yeah, absolutely. And I’ve got to say, I want one of those hats. I'm a hat guy. You know, I'll probably be ordering one. I have to admit, you know, I'm not always the biggest Doug Ford fan, but I’ve got to say that was a great hat.
Sabrina Maddeaux: The hat was pretty great. Maybe instead of raising taxes, we can start selling political merch. That's a new angle to raise public revenues.
Mike Moffatt: So we can eliminate the deficit through hat sales.
Sabrina Maddeaux: But here at the Missing Middle, we do try to be solution-focused. Is there anything a regular citizen can do about this situation or are we basically just left to hope that our politicians sorted out for us?
Mike Moffatt: Yeah, I mean, it is challenging that, you know, ultimately we don't have, you know, power to do all of that much directly. Our impact has to be indirect. I think the one thing I want to see from all Canadians is that Team Canada approach where, you know, I think if this ends up just being, you know, Albertans mad at Ontarians, you know, mad at Quebecers, then, you know, I do think the Americans kind of win at that point where if we're all just kind of fighting each other. So I think we have to sort of recognize this external threat and keep our attention that way rather than, you know, or like throwing each other under the bus and getting into these provincial squabbles, which is a Canadian pastime. And, you know, it can be fun in normal times, but I do think we probably would be better served sort of recognizing where the truth that threats are and as individual Canadians focusing our attention there.
Sabrina Maddeaux: I couldn't agree more. We need to stay away from the chaos and present as one strong Canada and one strong voice.
Well, thank you, everyone, so much for watching and listening. And of course, to our producer, Meredith Martin.
Mike Moffatt: And if you have any thoughts or questions about tariffs or the price of orange juice, please send us an email to [email protected].
Sabrina Maddeaux: And we'll see you all next time.
Some additional reading that informed the episode:
Trump's Team of Economic Yes-Men
Americans stocking up on foreign goods before Trump tariffs: ‘a sense of urgency’
Tariffs and trade: Experts pick the big charts to watch for 2025
This podcast is funded by the Neptis Foundation and is brought to you by the Missing Middle Initiative - a think tank housed in the Department of the Environment at the University of Ottawa