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A Tariff on Both Your Houses · Eh Sayers

• Tegan: Welcome to Eh Sayers, a podcast from Statistics Canada, where we meet the people behind the data and explore the stories behind the numbers. I'm your host, Tegan Bridge. What’s in a name? That which we call a tariff By any other name would… still cost as much. In the unlikely event that you're unaware, we are, once again, living in exceptional times and in a trade conflict with our largest trading partner. Look at us, being all star-crossed... trading partners. It is feels less… romantic in real life. There's been a lot of uncertainty about what this trade conflict means and what the implications are, so we've brought back a longtime friend of the show to answer our questions. Guy: Hi, I'm Guy Gellatly. I'm the Chief Economic Advisor at Statistics Canada. Tegan: If, like me, you're finding that it's been difficult to keep track of what's been going on, what was threatened versus what was actually imposed, we have a brief summary for you here. Guy: We've had a great deal of uncertainty and disruption over the last couple of months. If you go back to January and February, that's when a lot of the talk of tariffs, a lot of the trade conflict was beginning to intensify. So we get into March now, and the US imposed 25% blanket tariffs on goods coming from Canada. That quickly became about goods that were non-compliant with CUSMA, the CUSMA Agreement. We get a little bit deeper into March and, basically, we've got steel and aluminum tariffs being imposed in the US and then we've got autos basically in early April. So in a short period of time we've seen, you know, an escalation of that trade conflict and various countermeasures of course being enacted in Canada. Tegan: How important is our relationship with the United States, specifically, how deeply integrated is Canada's economy with the US? Guy: Probably the best answer there is extremely. There's a lot of different ways that that integration occurs. One of the go-to statistics is about 17% of our gross domestic product comes from our exports to the United States. So about 2.6. million jobs in Canada coming from, you know, are dependent upon those exports. We've looked at this in a variety of ways. You look at total household spending in Canada, 13% of that basically is dependent upon US imports. One of the really notable points where that integration is high is in kind of business investment spending. So if you look at investment in Canada on machinery and equipment, you know, roughly one half of that is coming from US imports, and that stuff is really key for productivity growth, for economic growth generally. So, again, lots of different channels and a very, very deeply integrated supply chains on both sides of the border. Tegan: And what sectors are most at risk here? Guy: Well, you know, it's funny, there's obviously a real risk coming from sectors like manufacturing that are very, very directly impacted by tariffs. And, you know, we see the escalation around things like steel and aluminum, and now autos. A lot of the sectors where we get our growth, you know, much of our growth are those sectors that are heavily integrated with the US. So good examples here, think oil and gas, and think the auto manufacturing sector, you know, lots and lots of economic activity in Canada comes, and lots of growth in Canada comes, from those supply chains basically, or through those supply chains. You know, it's something that's going to spill over generally into other sectors of the economy. If you think of just the amount of uncertainty that the trade dispute, the trade dispute is creating. It's difficult to think of sectors that aren't going to be impacted in some way, shape, or form. You know, we've just got data from our business conditions survey, and it was out for the second quarter. And so it talked to companies basically through April, into early May. And, you know, there's a great number of—it's about 50,000 establishments that export to the US and, you know, roughly half of those establishments think this could have a medium or a high impact on their business, the trade dispute. Tegan: I used the word uncertainty, which I think is pretty key here. This is still developing, this is still ongoing, but what do the early numbers suggest as this trade conflict continues to unfold? Guy: Well, I guess I'd point to a set of numbers. First, the trade data themselves, and again, what we saw early in the year was a sharp buildup. We saw a real ramp up in our trade activity, our exports to the us. And that's exactly what you'd expect as companies tried to get ahead of the tariffs, and so lots of shipments down south. And then of course, those began to gradually pull back into February and March. And with the release of the April numbers, we've now seen a very heavy pullback in our exports to the US. And that's coming from a lot of different sources: I mean, lower exports of passenger cars, light trucks, industrial machinery and equipment, consumer goods. Pretty much across the board pullbacks into the us. So, it's really having an impact now that we've kind of gone beyond the threat of tariff stage and into the actual, you know, adjusting to what these mean in terms of our trade flows. Tegan: And how are businesses and households adjusting to this period of disruption and uncertainty? Guy: Well, on the business front, lots of adjustment. I mean, one of the encouraging numbers there is that, you know, of companies that were exporting to the US almost 60% have been undergoing, you know, are adopting some sort of mitigation strategy. Whether that's sort of searching out new suppliers outside of the US, new customers outside of the US. Lots might be kind of pulling back on their expenditure plans, their investment plans as well. So there's lots of things going on to try to mitigate those impacts. On the household side, you know, obviously I think consumers and households, given the uncertainty, are adopting kind of a more cautious stance around spending. This was something that the Bank of Canada noted in their consumer survey for the first quarter. And that's one of these things, given the shifting sands that we see around tariffs right now, it's difficult to know how and when to spend in the short run. And that's one of the great elements of uncertainty that comes from this trade dispute. Tegan: How challenging is it to diversify our economy? Guy: Oh, in the macro sense, it is challenging. And I'm not saying that there aren't important steps that can't be taken here. There clearly are, and I think businesses and governments are sort of working toward those challenges. But at the end of the day, I mean, a great amount of our economic activity in Canada depends on our relationships with the United States. And that's one of these things that the current trade dispute has really driven home. We can diversify, but, as many of us know, you know, three quarters of our exports go to the US, and over 60% of the imports coming into the country come from the US. So those are awfully big numbers and, we can move that ship. But it'll probably be a kind of a slow moving ship to turn and, we'll sort of see where we get over the coming months. But I think it's been a perennial discussion in trade circles for, you know, decades now. And we'll see where we go in the near term. Tegan: You actually came and spoke with us a little while ago about Canada's productivity problem. There's also pressures on affordability. Could you talk about how some of these deeper challenges facing Canada's economy could affect our ability to weather this storm? Guy: You know, it's a great question. 'Cause I think, ultimately, if the one thing that we have learned from looking at the whole host of disruptions that we've seen over the last five years is that households, businesses are pretty resilient in terms of weathering that storm. So that's something that we can put in the positive column. But at the same time, there are some very notable challenges that sort of sit there in the background. You mentioned productivity. And again the discussion around productivity has really flared up really over the last couple of years. And it gets at this notion of business competitiveness and if we're doing the right things in Canada to get the sort of growth that is going to generate prosperity over time. And that's kind of what's going on with the… This is just the latest in a series of shocks that shine a very bright light on that performance. And, you know, given the changing nature of our relationship potentially with our largest trading partner, are we well positioned to compete on a wider sphere or on a global sphere, differently than we have been doing. So, lots of questions there. And again, it's easy to sort of get into this notion where, yeah, you can kind of rhyme off a series of challenges. But there's lots of opportunity there too. You know, there's opportunity around to sort of expanding those markets. There's opportunity around innovation and technology adoption: all of this talk about AI and the potential there. You know, there's lots of upside potential for the Canadian economy to really harness the impacts of a lot of this change and have that be kind of a key driver going forward. Tegan: What key indicators should we keep an eye on in the short term as the situation continues to develop? Guy: Oh, you know, that's a great question. We've focused on, obviously, we talk trade, but we can equally look at things like the employment data. You know, again, one of the risks around trade disputes and tariff uncertainty is that it can really chill hiring intentions, and the labour force numbers that we've seen basically kind of February through May now. You know, we've basically had four months of no net growth. So the momentum that we had on the job side, maybe late last year into the start of this year, has really slowed with not a lot of growth as we get into the summer employment season for students and things like that. The unemployment rate has trended a little bit higher. It's at 7% now. So labour numbers front and center because obviously those job numbers matter to people. We could look at, continue to look at the trade numbers, the international trade numbers, some of the investment numbers. Canada, US investment numbers are gonna be key. We've already got, uh, well, we don't, we will have shortly some of that for the, uh, for the first quarter. The travel numbers, I think, you know, if there's one area that we've got a lot of requests for, it's that travel data, you know, and Canadians to some extent are voting with their travel dollars, right? You know, you've seen such a big pullback in the volume of travel to the US, and I think the May numbers just came out and they're down 38% year over year. So you look at the number of Canadians kind of crossing back by auto into Canada, uh, you know, it's almost 40% lower than it was. Airline travel, you know, Canadians coming back, 24% lower than it was at this time last year. So, you know, people clearly are motivated and and exercised about the issue and what it means for livelihoods in Canada generally. And we certainly see that in the macro data. The other ones to watch: price data. You know, when we looked at the business condition survey there were lots of, of companies that were kind of flagging the “well, what are the impacts of these tariffs likely to be?” Well, you're gonna get an escalation in, in, you know, cost pressure on input costs and material costs, and that might kind of put upward pressure on selling prices as well. So, you know, at some level, tariffs are all about prices, and I think going forward we'll continue to watch those very, very closely. Tegan: And where can listeners go to get more information? Guy: You know, we've set up an integrated hub for all of the releases. You know, we try to kind of shine a focus on Canada-US, just given the exceptional nature of what's occurring. And with every major release, you can link to that hub, and it will give you the most current set of numbers and information among, you know, how the relationship continues to evolve. And we do that, you know, whether we're talking about the labour, the output numbers, trades certainly. There's a whole host of indicators there that we're tracking closely. And hopefully we can get them into a kind of a one stop shop and go from there. Tegan: Is there anything that I haven't brought up that you'd like to talk about? Guy: Again, I will sort of drive home that it's obviously an exceptional time, given the importance of that longstanding trading relationship with the US, and it's one that does have enormous bearing on our economic livelihood north of the border and, you know, as many have pointed out, south of the border as well. So we'll just continue to watch developments as they unfold and, and try to get that information into the hands of Canadians. Tegan: I feel like I've had enough of exceptional times in the last few years. Guy: I think five years of exceptional times is probably enough. Tegan: Yes. I would strongly agree with that. Well, thank you so much. Thank you for joining us. Thank you for sharing your time and your expertise. Guy: Thank you. Tegan: You've been listening to Eh Sayers. Thank you to our guest, Guy Gellatly. You can find a link to the hub Guy mentioned in the show notes to this episode. Go hence to have more talk of these sad things. For never was a story of more woe Than this of the US and her Canada-oh. You can subscribe to this show wherever you get your podcasts. There, you can also find the French version of our show, called Hé-coutez bien! If you liked this show, please rate, review, and subscribe. And thanks for listening!