How Should Canada React to the Looming U.S. Trade War?

Abstract

We apply the quantitative theory in Pujolas and Rossbach (2024), which determines optimal tariff rates in a multi-country, multi-sector  general equilibrium model with input-output linkages and services trade, to a hypothetical trade war between the United States and Canada. While the United States can “win" a trade war if its tariffs against Canadian products are optimally chosen, a 25% across-the-board tariff met with optimal retaliatory tariffs by Canada causes the United States to also lose the trade war. Canada loses the trade war in all the scenarios we consider. However, the United States gains substantially more from engaging in a trade war with China than with Canada.