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

Author

Listed:
  • Pau S. Pujolas
  • Jack Rossbach

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.

Suggested Citation

  • Pau S. Pujolas & Jack Rossbach, 2025. "How Should Canada React to the Looming U.S. Trade War?," Department of Economics Working Papers 2025-01, McMaster University.
    • Handle: RePEc:mcm:deptwp:2025-01
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    References listed on IDEAS

    as
    1. Timothy J. Kehoe & Pau S. Pujolàs & Jack Rossbach, 2017. "Quantitative Trade Models: Developments and Challenges," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 295-325, September.
    2. Fontagné, Lionel & Guimbard, Houssein & Orefice, Gianluca, 2022. "Tariff-based product-level trade elasticities," Journal of International Economics, Elsevier, vol. 137(C).
    3. Joseph Steinberg, 2019. "On the Source of U.S. Trade Deficits: Global Saving Glut or Domestic Saving Drought?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 200-223, January.
    4. Harry G. Johnson, 1953. "Optimum Tariffs and Retaliation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 21(2), pages 142-153.
    5. Lukas Albrecht & Trevor Tombe, 2016. "Internal trade, productivity and interconnected industries: A quantitative analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 237-263, February.
    6. Joseph B. Steinberg, 2020. "The macroeconomic impact of NAFTA termination," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(2), pages 821-865, May.
    7. Timothy J. Kehoe & Kim J. Ruhl & Joseph B. Steinberg, 2018. "Global Imbalances and Structural Change in the United States," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 761-796.
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    Keywords

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    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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