If Trump attacks Canada’s GST next, we must defend it

Published in The Globe and Mail. 

U.S. Treasury Secretary Scott Bessent recently said that President Donald Trump’s reciprocal tariff scheme, due on April 2, will feature country-specific rates. What that means for Canada, like all U.S. trading partners, depends on which real or imagined transgressions Mr. Trump and his officials use to justify their actions. A likely target for Canada is our tax policies, notably value-added taxes (VATs) such as the federal goods and services tax (GST) and the harmonized sales taxes (HSTs) that most provinces levy alongside it. Retaliatory tariffs are no response to that kind of attack. Canada needs to be ready for a prolonged period of U.S. economic antagonism. We could strengthen ourselves for that by doubling down on the very taxes Mr. Trump dislikes.

The value-added taxes of trading partners – especially European countries, whose rates are higher than ours – have been a target of American complaints for years. Among the talking points the Trump administration uses to pump up its base – and likely themselves – is how buyers of cars shipped from the U.S. to the European Union pay double-digit VATs, while buyers of cars shipped from the EU to the U.S. pay no VAT. The administration would likewise complain that Canadians pay GST and HST on the products they buy from the U.S., but Americans pay no GST or HST (just local taxes) on the products they buy from Canada.

Like so much in Mr. Trump’s approach to international economics, the notion that VATs unfairly penalize imports and promote exports is superficially plausible, yet totally baseless. All sales taxes, including those of many U.S. states and cities, work that way. Buyers of Canadian products subject to U.S. sales taxes pay them to the governments that levy them, while buyers of U.S. products subject to Canadian taxes pay them to our governments. Either way, the taxes apply equally to imported and domestic products. There’s no discrimination against imports and no subsidy to exports.

Good luck explaining that to Mr. Trump though. The American federal government levies no general sales tax. It relies disproportionately on personal and corporate income taxes – and, lately, on unsustainable borrowing – to finance its spending. U.S. state and local sales taxes (like those that still exist in British Columbia, Saskatchewan and Manitoba) are old-fashioned ones that apply to intermediate purchases before sale to the final consumer. That type of sales tax can raise costs throughout the value chain. This “cascading” effect bakes different amounts of tax into final products, which is distortionary, and raises the end price of products not formally subject to tax – notably exports, which makes them less competitive.

A smart U.S. tax reform would establish a federal VAT, using the proceeds to finance cuts to U.S. personal and corporate income taxes and reduce borrowing. Ironically, the higher tariffs with which Mr. Trump wants to finance his tax cuts act like old-fashioned sales taxes, also cascading through the value chain every time products cross borders. That is even more distortionary, and bakes tariff-related costs into U.S. products, including exports – as U.S. producers of steel- and aluminum-containing goods are now noticing. Perhaps Mr. Trump imagines that Europe and Canada will revert to old-fashioned sales taxes. Or even that they will tax their own exports to the U.S. – a double whammy for U.S. buyers, who would pay higher prices and higher taxes, since their own government would no longer collect the tariffs. Whatever he thinks, Canada must not respond by making its tax system less efficient.

The U.S. does have legitimate complaints about foreign protectionism, such as Canada’s dairy cartel, which impedes U.S. exports, hurts Canadian consumers and makes domestic production of dairy products uncompetitive. But for the White House to use tariffs as a cudgel to force Canada, or anyone else, to change its tax system is utterly illegitimate, and means that its trade war against the rest of the world is likely to go on until the damage done at home by it and other rash acts of the Trump administration make Americans themselves revolt against it.

For Canada, the prospect of a protracted period of U.S. trade aggression makes some measures – notably retaliatory tariffs and fiscal bailouts of affected industries and workers – less attractive. We cannot convince Mr. Trump he is wrong, and we cannot bear the economic cost of a tit-for-tat trade war that lasts as long as it takes for enough Americans to realize he is wrong. We need to attract and retain talent, boost investment, and raise productivity. We need to get more efficient and competitive. And if getting there means relying more heavily on the GST and HST to lower personal and corporate incomes taxes and reduce borrowing, we should push back against Mr. Trump’s economic illogic and do that too.

William Robson is president and CEO of the C.D. Howe Institute.