A trade war will hurt the United States the most, Trudeau advisor says

As signs of a global trade war loom larger, Canada will have little choice but to realign its economic interests towards regions like Europe and Asia, says Dominic Barton, Prime Minister Justin Trudeau’s top economic advisor and senior partner at McKinsey & Co.

Barton claims that, so far, the international business community has acted with admirable restraint, something which soon could be in short supply.

The trade war drums are beating louder, as last week the United States increased tariffs on US$34 billion worth of Chinese imports, to which China responded with US$34 billion of its own tariffs on US-imported goods. And as earnings season begins, economists are predicting a stronger impact from trade concerns on global markets.

“[A trade war] will affect global growth if it continues,” Barton told BNN Bloomberg. “The initial tariffs of US$34 billion are not going to have a big impact over the short term. I think the biggest impact is uncertainty. People are worried about how far this goes, therefore I think the even bigger impact in the short term is on business investment.”

Barton contends that the global economic players have up until now responded to trade war concerns with restraint, a stance which may change over time. “I think there is patience there, but if the tariffs just start increasing willy-nilly, I think the populace and businesses are going to start to say, ‘You can’t just let this happen,’” he says. “So I actually think there is restraint right now. People are hoping that maybe there is more rhetoric than reality.”

At this point, US President Donald Trump has threatened that up to $500 billion worth of goods from China could ultimately face hefty tariffs. Barton believes that, overall, it could be the United States that comes out the worse for wear.

“Trade wars don’t help anyone, particularly the United States,” he says. “The United States is going to get hammered. You’ve heard the US Chamber of Commerce on this, saying this is like knee-capping yourself.”

In May, the US government announced that Canada would not keep its exemption from steel and aluminum tariffs, claiming that Canadian imports fall under the rubric of goods which could threaten US national security. The Trudeau government quickly retaliated with its own set of tariffs on dozens of US goods. Experts say that with its smaller economic heft along with utter dependence on exports to the US, Canada’s economy could take a big hit.

Barton claims that over the long term, businesses in Canada and globally will learn to adjust their supply chains, ultimately resulting in a realignment of global trade relations.

“I think you’re going to see a lot more movement on that front, for example, between Europe and Asia. There are a lot of discussions going on between those two regions of the world as they think about what they’re going to do,” he says.

“Everyone has to start thinking about diversifying. The challenge is that the US is such an important economy that you can’t abandon it, you can’t ignore it,” he says. “But you’re going to see much more intra-regional trade between Asia and Europe, within Asia, South America and Europe, Canada and Europe and Asia. You’re going to see some shifts.”