Tariff threats are already driving investment out of Canada

As U.S. President Donald Trump threatens tariffs upon tariffs, businesses, consumers and policy-makers are scrambling to figure out how to respond. But the mere threat of tariffs is already having an impact.

"Whether or not they ever be put into place, the damage is done," said Greig Mordue, a former auto industry executive and associate professor at the W. Booth School of Engineering Practice and Technology at McMaster University.

He says Trump's threats have already changed the landscape. Whether he goes ahead with the tariffs or not, or whether he carves out specific exemptions, the threat alone will drive investment out of Canada and into the U.S.

"For at least the next four years, there will be no serious investment in the Canadian automotive industry," said Mordue.

Experts have been warning that this would happen ever since Trump was elected.

When the Bank of Canada cut interest rates last month, one of the key reasons was concern about business investment in Canada.

"Even if no tariffs were imposed, a long period of uncertainty under the cloud of tariff threats would almost certainly damage business investment in Canada," wrote the central bank in its Summary of Deliberations, fleshing out its reasoning for the interest rate cut.

The consultancy firm KPMG asked 250 businesses in Canada what actions they were taking ahead of the tariffs and what they were planning to do down the road. KPMG didn't release precisely who was included in the survey, so we can't be sure that it represents the views of business leaders across all industries and regions.

But the findings provide some crucial insight.

It found nearly half of the businesses contacted "plan to shift investments or production to the U.S. to serve the U.S. market and reduce costs."

Most also said they had diverted or are considering diverting goods to countries not facing tariffs. 

Business investment is key to growth in any economy.

When businesses invest, they generally need workers to build factories, assemble machinery or develop software. So, when business investment dries up, that usually means less demand for workers and fewer options for job seekers.

Economists say high business investment can have a cascading series of positive impacts on the economy.

"New capital tends to make workers more productive, offering more scope for pay raises that aren't directly inflationary," said Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets.

But he says business investment dropped off in 2015 when oil prices plunged and have remained stubbornly low ever since.

Economists warn that has weakened the Canadian economy and gives Canada less cushion to weather a trade war.

"GDP per capita has declined for eight of the past nine quarters, and business investment has been stagnant. Both cyclically and structurally, Canada's economy is not well positioned to absorb a shock of this scale," wrote Royal Bank's chief economist Frances Donald and deputy chief economist Nathan Janzen.

That weakness was already an issue before the threat of tariffs emerged. Now, everyone from economists and consultancy groups to the Bank of Canada are warning it may get worse.

"Companies were already re-evaluating their investment plans in the face of trade policy uncertainty. With significant tariffs, the risk of capital flight would increase, exacerbating Canada's competitiveness challenges and low productivity growth," wrote the Bank of Canada in its Summary of Deliberations.

There is a lot of uncertainty and a lot of pessimism, but the threats to Canada's economy have also sharpened resolve and prompted different levels of government to take action.

Provinces and territories are talking seriously about removing long-standing trade barriers. The federal government and opposition parties have indicated a new openness to developing major infrastructure projects.

"The world has changed quite a bit in the aftermath of what we have seen from what has been our friend, the United States," said federal Energy Minister Jonathan Wilkinson. "I think it does call for us to reflect on whether there are some conversations that we need to have in this country."

If nothing else, the threats of a trade war have shown the status quo can change quickly. The question for Canadian businesses and policy-makers alike is whether they can change quickly enough to offset the potential damage looming on the horizon as Trump's tariff deadlines get closer.