My view remains that the “hard data” is not going to be useful until the collapse of shipping volumes makes its way through the logistics chains (which is only starting about now). I have little doubt that things will get “scary” quite fast, but have little idea how quickly the Trump White House will take before reacting. Since I am not offering market prognostications, I will just finish off with a few unrelated observations.
Imports Subtract from GDP
One of the wacky features of GDP is that imports subtract from the total. Normally, an import transaction for a good will be paired to a corresponding increase in inventory (which is a form a of investment) or some form of consumption1 (if sold in the quarter the good arrived), both of which add to GDP. But if we look at the advance estimate of 2025 Q1 GDP, we see a surge in imports, but it is not clear whether the estimates of the other components also caught the surge. As such, we would not get the expected cancellation, and GDP is adjusted downwards in this estimate (only to be corrected in later revisions of GDP as more data arrive).
Since there is always a matching transaction, the subtraction of imports cannot result in a negative level of GDP. However, negative growth of GDP due to imports is possible — if imported goods replace domestically-produced goods, consumption is unchanged while imports rise, thus there is no cancellation when we calculate GDP using expenditures. If we calculate GDP based on production, domestic production necessarily has to fall. (Note that if everything was measured properly, GDP is the same whether we calculate it based on expenditures or via production, and matches Gross Domestic Income. Some people get mad about relating consumption to GDP — as the name refers to production — since they do not understand that we can measure GDP either way.)
The expenditures formula for GDP (Y) is as follows:
Y = C + I + G + (X-M),
where C = consumption, I = investment, G = government expenditure, X = exports, M = imports.
Given that M has a negative sign in front of it, junior high level algebra tells us that imports subtract from GDP. This observation gets some pedants really mad, admittedly because the people making the observation mess up the implications. As I noted above, imported goods have to go somewhere: they are either “consumed” by consumers/government/firms, or end up as unsold inventory (and inventory investment is part of I). As such, a properly measured GDP level cannot be negative. Nevertheless, imports replacing domestic production does lower the level of GDP, and we can get wacky effects from the negative sign in front of imports in GDP calculations. (In addition to imports possibly showing up quicker in GDP revisions, the negative sign on imports means that the import deflator “works backwards,” which can create strange short-term effects if there are import price spikes not matched by measured domestic prices.)
Aside: Model Train Industry Bands Together
(Link: https://www.youtube.com/watch?v=m3Nljba40xQ)
The above video is somewhat impressive if you know anything about model railroads. It brings together most of the major industry players that I am aware of (I used to read my dad’s model train magazines when I was a kid in the 1970s, and I have a small N-gauge layout now). They all point out that the tariffs make no economic sense: there was never an American manufacturer of detailed model railway equipment. All the tariffs will do is destroy the industry — including American firms that design and manufacture equipment overseas, along with domestic distributing and domestically-produced accessories.
This is not a major industry — it is a niche product with a shrinking number of customers. (This is made up by extracting money from old guys with too much disposable income by selling them increasingly overpriced collectibles.) If it dies, nobody in their right mind would put up a factory in the United States to produce HO model locomotives — a stagnant/dying market with no distribution network is not a great market segment to enter into.
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| Bachmann N gauge locomotive with CD case for size comparison |
The demise of model railroad manufacturing in the United States is an interesting microcosm of American post-war manufacturing. Initially, model railroading was segmented nationally, and Lionel dominated the American market with (large) O gauge trains. However, O gauge was too large for customer tastes2. Lionel did not adapt well, and the market was taken over by other firms. Both HO and N gauge locomotives (N gauge example above) are very detailed, and manufacturing migrated overseas. Unfortunately, the demise of long-run passenger rail in North America and the rise of radio-controlled models and then video games shrank model trains into a niche hobby.
Once again, this is not a major economic news story by itself. But it is yet another example of a niche industry that is dependent upon overseas (mainly Chinese) manufacturing that is quietly going to get obliterated if the embargo remains in place for much longer. The only plausible reason to support tariffs is to support infant industries — but you actually need to identify those industries before you set up the tariffs.
Whither Canada?
The Canadian economy is also in a Wile E. Coyote situation. We have no direct embargo on Chinese goods, but logistics might get whacked alongside the American ones. At the same time, our largest export market is teetering, and we face tariffs of random amounts.
As such, Prime Minister Carney’s promises of a small income tax cut along with increases in defence spending can be seen as a reasonable fiscal loosening in the face of cyclical woes. Although this should theoretically steepen the curve, aversion to risk assets probably matters more in the short run. It is hard to get too bearish on bonds in an environment of heightened recession risk.
Although it was a funny election, we are back into roughly the same place we were before. The NDP (social democrat party) will need to find a new leader, and so will likely just vote along with the minority Liberal to avoid the need for another election until the new leader is chosen.
Although Conservative Party leader Pierre Poilievre lost his seat in Ottawa, the indications are that he will find a party member in a safe seat to stand down, allowing Pierre to return to Parliament after a bye-election. Although there are certainly Conservatives that would be happy to get rid of him after blowing a 25% polling lead, it is unclear that there is anyone else will do a better job of keeping the shaky alliance between Western and Eastern conservatives together.
The main key event facing Canada will be the personal meeting between Carney and Trump. Trump had largely moderated his anti-Canadian rhetoric after sinking the Conservatives’ polling in the election campaign, and it remains to be seen whether he has the same level of personal animus towards Carney as Trudeau, and whether that translates into another massive tariff increase.
More accurately, consumers or the government could consume the good, or it could be used for fixed investment by firms.
O gauge sets had an unrealistic third rail which prevented kids from causing short circuits with ill-advised track configurations. More importantly, real-world standard gauge trains have exceedingly wide turning radii. The most popular model railroad scale is HO which is smaller than O gauge, but even it requires somewhat unrealistically tight turns to allow 180°turn on a 4 foot wide plywood sheet train table. Long passenger cars and massive steam engines (e.g., a 4-8-8-4) will either derail or look comically stupid on a too-tight curve. Since those are the prestige equipment hobbyists want to run, indoor model railroads are generally HO or smaller. Railways run in gardens (more a European hobby) can use the larger G gauge since hobbyists have more room to work with outside.
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