While there are about 50 days until Donald Trump’s inauguration, he has been moving quickly to put his leadership team and economic plan in place. In this blog I will examine some of the key elements of his plan and how they may impact on the economy, transportation and Canada.
- Demand
Donald Trump has signaled that he may try to stimulate demand in the United States by maintaining some tax cuts and introducing new ones, specifically those that will benefit higher income earners. These tax cuts are similar to the ones he introduced during his first term as president. While many have questioned the effectiveness of “trickle down” economics, they would likely have some inflationary impact. The U.S. dollar has been on the rise against other currencies. He may try to weaken the dollar which would drive up the cost of imported goods.
- Supply
Over the past few days, Trump has been writing that he will impose 25% tariffs on all goods imported from Mexico, Canada and China. Since there is a free trade agreement between the U.S.A., Mexico and Canada, there is a question as to whether these types of unilaterally imposed changes are legal or if they are a bargaining chip from Trump to extract specific concessions. In his social media posts, he did highlight that he is expecting actions from the three named countries to reduce imports of fentanyl.
Assuming the proposed tariffs go forward, they would have multiple impacts. First, since there is so much trade between the three NAFTA countries, this would have a significant inflationary effect. Keep in mind that in the area of automotive production, auto parts move back and forth across borders. This would drive up the prices of cars in all three countries. It would also decrease demand from some pricey imported goods.
Second, Canada is the number one exporting country for 35 American states. Canada would likely impose tariffs on goods imported from the United States. This would inflate prices and probably curtail demand for certain U.S. manufactured goods (e.g. Kentucky bourbon) as it did last time.
Third, the United States imports 4 million barrels of oil a day from Canada . A tariff on imported oil would likely drive-up prices for gasoline and would be punishing to many Americans.
- Mass Deportations
Donald Trump has talked about rounding up 13 to 15 million illegal immigrants in the United States and deporting them. This is an extraordinary logistical challenge. Whatever the ultimate number of deportees is, this will be a major task that will have a range of consequences.
First, these individuals are very important in specific sectors of the economy. A certain number of immigrants are employed in the agricultural sector and in new home construction. If some percentage of these people are removed, they will have to be replaced by American workers. Since the U.S. is close to full employment, it will be a challenge to find suitable replacements. Moreover, these people will likely have to be replaced at higher wages. This could further impact inflation.
Second, Canada and Mexico will likely not accept these people with open arms. Canada has a different climate than the United States. Anyone trying to cross into Canada in the middle of winter will find it very difficult.
Canada’s major cities have a housing shortage and likely won’t have suitable jobs to offer immigrants. There aren’t millions of jobs waiting to be filled. In fact, Canada is in the process of reducing the number of legal immigrants that it will now accept. While Canada’s long unmanned border with the U.S. may be easy to cross at locations that are not established border points, Canada will want to deport people that don’t belong in the country.
- DOGE
Donald Trump has signaled that he plans to establish an advisory committee (Department of Government Efficiency) that will assess government efficiency. The U.S. Federal Government employs a massive number of people. It is likely that as a result of this effort, tens of thousands of people could receive layoff notices. This would drive up unemployment. It may not be easy for these people to find alternate employment. This could put a damper on economic growth.
- The U.S. Economy
Clearly there will be a number of disruptive forces at play when Trump takes office. The impact on the economy will depend on Trump’s determination to complete these tasks and how they are executed. Tax reductions, imposing tariffs on imported goods, exporting goods to which retaliatory tariffs are applied, mass deportations, labor shortages, plus replacing immigrant labor with U.S. workers at higher costs, collectively, will likely be inflationary. Reducing taxes will also drive up the U.S. deficit.
- Transportation
Millions of manufacturing, and transportation jobs in the three NAFTA countries are dependent on cross-border trade. If Canada must begin buying oranges offshore rather than from Florida or buying wine or tomatoes from a foreign country rather than from California, this will cost jobs in the United States. Similarly, 75% of Canadian exports go to the United States. Any erosion in these numbers will be very punishing to Canada. These actions would badly hurt truckers and railway workers. The Canadian government will have to do everything possible to avoid the potential negative effects of Trump’s proposed policies.
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