The tariff on Canadian hockey sticks has gotten a lot of attention. However, fewer than 1% of hockey sticks imported into the U.S. are manufactured in Canada. This tariff is mostly symbolic, like renaming “Lake Ontario” to “Lake America.”
Less attention is being paid to the more significant tariffs imposed on key Canadian imports. President Trump imposed tariffs as high as 50% on Canadian steel and aluminum, 25% tariffs on automobiles and certain auto parts, combined tariffs of approximately 36% on softwood lumber, and a 50% tariff on plywood. These tariffs could significantly impact American industry, particularly the domestic auto industry.
The United States and Canadian supply chains are highly integrated due to the two countries’ geographical proximity and more than 30 years of free trade under the North American Free Trade Agreement. These supply chains cannot be easily changed. Automakers likely will pass tariffs on to consumers through higher prices, after new auto prices have already risen by 30% since the pandemic. Sales are likely to then fall, resulting in lower profits and employment in this sector. Given auto manufacturing’s footprint in Michigan and the state sharing a border with Canada, the impact on Michigan’s economy may be significant.
Both countries’ economies and consumers have much to lose if this trade war continues and escalates.
Other industries may be similarly impacted, particularly housing. Potential home buyers have already faced both high home prices and mortgage rates since COVID. Home prices have increased substantially, while mortgage rates have approached 7%. Since lumber and plywood are significant inputs in the construction of new homes, these tariffs could cause home prices to increase further.
Canadian retaliation includes tariffs of a similar magnitude on American exports, such as appliances, plastics, automobiles, sporting goods, paper products, dairy products and a host of other exports. The list of American exports subject to these tariffs spans numerous pages on the Canadian government’s website. These tariffs are likely to reduce profitability and employment in these American industries.
The Trump administration exempted the import of rock salt, potash and crude oil from the tariffs. Potash is a critical ingredient in fertilizer, and Canada is the source of approximately 80% of U.S. potash imports for domestic use. Rock salt is critically important for clearing roadways during the winter, while Canadian crude oil imports are a major source of U.S. oil supplies.
The Canadian government could choose to escalate the trade war by banning the export of these items to the United States. This would be detrimental to the Canadian economy but could also inflict significant economic pain on the United States. Canadian crude oil is heavy, and many Midwestern refineries are configured to process it, making it difficult to quickly substitute oil from other sources. A significant disruption could therefore put upward pressure on oil prices before alternative supplies become available. Fertilizer prices have increased substantially since COVID, while food prices have also risen. Further fertilizer price increases could result in additional consumer pain at the grocery store.
Both countries’ economies and consumers have much to lose if this trade war continues and escalates.
Dr. Christopher Douglas came to the University of Michigan-Flint in 2006. He earned a B.S. in Electrical Engineering and a B.S. in Economics from Michigan Technological University in 2001, and his Ph.D. in Economics from Michigan State University in 2007. As Professor of Economics, he teaches Principles of Microeconomics, Principles of Macroeconomics, International Economics, Public Finance and Sports Economics.
