Free trade is flawed, but protectionism is worse
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The United States has delayed its 25 per cent tariffs on Canadian goods for 30 days, giving Ottawa a brief window to assess its economic response. This pause should not be mistaken for a change in direction—America First nationalism remains a driving force in U.S. trade policy.
While some argue that protectionism shields domestic industries, economic history suggests otherwise. Canada must resist the temptation to respond in kind and instead reaffirm its commitment to free trade.
During his inaugural address, U.S. President Donald Trump called for overhauling the trade system to “protect American workers and families.” He framed tariffs as a way to tax foreign countries rather than American citizens, but many economists argue that tariffs function as an indirect tax on domestic consumers.
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Tariffs act as trade barriers, raising the cost of imported goods and shielding domestic manufacturers from foreign competition. While this can provide short-term benefits to select industries, the broader economic impact is negative. Higher import costs are ultimately passed on to consumers, disproportionately affecting lower-income households. A 2019 study by the Federal Reserve Bank of New York found that U.S. consumers bore nearly the entire cost of Trump’s tariffs on Chinese goods in the form of higher prices.
Over time, trade restrictions shrink markets and trigger retaliatory tariffs, further disrupting supply chains. The World Trade Organization (WTO) has warned that trade wars often lead to reduced global trade volumes and economic stagnation.
Trump’s admiration for U.S. President William McKinley’s pro-tariff policies is also worth scrutinizing. McKinley, dubbed the “Napoleon of Protection” by supporters, championed high tariffs in the 1890s, but historical evidence suggests they harmed American consumers.
According to historian Charles W. Calhoun, McKinley’s tariffs made imported goods prohibitively expensive, forcing Americans to buy higher-priced domestic alternatives. Merchants, benefiting from reduced competition, raised prices further. Rather than fostering prosperity, this approach intensified public dissatisfaction and contributed to economic unrest.
Trade, however, is not without its complexities. Unfettered free trade has drawbacks, and America First advocates are not entirely wrong to point out the failures of some global trade agreements.
A truly free trade order is rare. Many of the world’s strongest economies, including the U.S., relied on protectionist policies during their early development. Economists such as Ha-Joon Chang and Friedrich List have argued that strategic industrial policies play a key role in economic growth.
Canada’s own history offers an example in Sir John A. Macdonald’s National Policy, which helped build central Canada’s manufacturing base—though at the expense of other regions, particularly the Maritimes and Western Canada.
Protectionist sentiment is also fueled by the decline of the Rust Belt. The once-thriving industrial regions of the Midwest and northern states have faced economic stagnation.
Some nationalists blame free trade, particularly NAFTA, but research from the National Bureau of Economic Research (NBER) suggests the decline in U.S. manufacturing jobs began long before NAFTA or other major trade agreements.
The evidence points instead to technological change and automation as the primary drivers of manufacturing job losses. A 2017 study from the Centre for Business and Economic Research at Ball State University found that automation accounted for 88 per cent of U.S. manufacturing job losses between 2000 and 2010, rather than trade.
Many economists also argue that labour unions’ reluctance to adapt to competition contributed to offshoring, as companies sought more flexible labour markets. A 2018 paper from the Cato Institute suggested that rigid labour agreements and high production costs, rather than foreign competition, drove many companies to relocate.
Economic nationalism is gaining ground, but tariffs are not the answer. While Chang’s argument for protectionism may have applied in the past, its relevance today is weaker.
The idea that tariffs create prosperity is disputed by economic research. Rather than fostering economic growth, tariffs inflate prices, reduce trade, and lead to retaliatory measures that damage industries on both sides of the border.
Canada should resist reactionary protectionist measures and instead focus on removing internal trade barriers—a longstanding economic challenge that continues to fragment the national economy. According to a 2021 report from the Bank of Canada, eliminating interprovincial trade barriers could increase GDP by up to four per cent.
With Canada potentially facing a change in political leadership, policymakers must learn the right lessons from the America First agenda.
National economic renewal is a valid goal but must be pursued through smart policy, not trade barriers. Strengthening the economy requires reinforcing free trade while addressing legitimate concerns about economic displacement.
That is how Canada can move forward without falling into the protectionist trap.
Joseph Quesnel is a senior research fellow with the Frontier Centre for Public Policy.
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