Business organizations and politicians have raised the idea of multibillion-dollar bailouts for companies and workers as one answer to any new U.S. tariffs on Canadian goods.

In a survey earlier this month by the Canadian Federation of Independent Business (CFIB), 18 per cent of respondents reported they had already experienced order cancellations. Some 14 per cent indicated their business could not last more than three months without a government bailout and another four per cent said they wouldn’t even make it a month.

A news report last month suggested that the federal government was planning a package of pandemic-style relief. Ontario Premier Doug Ford has said his province would need to look at spending billions on an aid and stimulus package. Bank of Canada governor Tiff Macklem estimates that if tariffs were broad and long-lasting, economic output could be permanently lower.

Provincial and federal governments, along with the business community, need to carefully think through any kind of large-scale support. It is particularly important to take stock of what worked and what didn’t during the COVID-19 pandemic, and what could be different about this crisis.

Where would relief go?

Initial subsidies would almost certainly be targeted to larger sectors directly facing tariffs. Our manufacturing industry, for example, accounts for nine per cent of Canada’s gross domestic product (GDP). U.S.-based customers constitute 70 per cent of this sector’s global trade. However, heavy tariffs would not only dampen export sales, but also hurt downstream suppliers as well as the service sector. Manufacturing employees who lose their jobs are less likely to go to restaurants or movies.

The Canadian Chamber of Commerce is recommending that employment insurance (EI) with enhancements could be the first line of support. This has been echoed by the Canadian Labour Congress as an easy and fast way to obtain benefits. While EI is an insurance scheme with premiums based on normally expected unemployment rates, it could be topped up on a short-term basis with revenues from any of our own retaliatory tariffs.

The Canadian Manufacturers & Exporters has called for direct wage support. This could be feasible since the online portal created during the pandemic for the Canada Emergency Wage Subsidy (CEWS) worked technically well and could be readily relaunched. The portal was administered by the Canada Revenue Agency (CRA) and funds, once approved, could quickly be deposited, since all businesses have files with the CRA.

Like CEWS, any new labour subsidy could be designed strictly to help businesses retain their workers and stay afloat, thereby avoiding layoffs or outright closures.

This would be less costly to administer than EI, which would require bank transfers to each employee rather than one wage subsidy transfer per business.

How would our current challenge be different? Any tariff crisis will be triggered largely because of low demand for some manufacturing goods and the associated labour in producing them. In contrast, COVID-19 triggered an immediate and simultaneous decline in both demand and supply of non-essential goods. That’s because consumers and employees were focused on their well-being and not so much on normal consumption and production.

What did CEWS teach us?

We need to remind ourselves that government spending during the pandemic contributed significantly to inflation, which we are only now overcoming. But unlike CEWS that had many eligible applicants, a tariff subsidy would be likely to have fewer claimants since not everyone sells directly or indirectly to the United States.

Over the 84-week duration of the CEWS program, the federal government paid out over $100.2 billion in wage subsidies to 460,070 businesses. A high approval rate of almost 100 per cent was not surprising since it was reasonably easy for businesses to demonstrate a revenue decline compared with the same period the year before the pandemic.

Towards the end of the program, auditor general Karen Hogan detected more than 50,000 businesses that had received payments totalling almost $10 billion, despite insufficient proof of a revenue decline. She extrapolated that a much larger amount — potentially $15.5 billion in benefits — might have been overpaid.

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It’s clear there is room for improvement in any similar subsidy launched in response to tariffs. One idea would be to require an accountant or auditor to verify claims within three months of an application. There would also need to be clear rules so that deserving businesses could claim a subsidy without too much administrative effort, while ensuring employers did not enrich themselves beyond their financial losses.

Some other important questions that emerged following the launch of CEWS would need to be considered, including:

• Would subsidy recipients be able to pay out higher executive compensation? Initially there was nothing to prevent CEWS from being used for higher pay to executives. A year into the program, the government introduced new rules requiring businesses to repay CEWS if they increased their executive compensation from pre-pandemic levels.
• Would bailout recipients be able to reward their shareholders with higher dividends or share buybacks with cash from the subsidy? Reports from the financial media confirmed that some CEWS recipients increased their dividend payouts during the pandemic. My co-authored research shows 17 per cent of public corporations that acknowledged receiving CEWS also increased their dividends to shareholders.
• Would eligibility be based on annual or monthly revenues and/or incomes? CEWS was based on reported declines in monthly revenues without considering annual revenues. Research and media reports show that many recipients reported higher revenues or greater net income on an annual basis. That doesn’t mean companies did not play by the rules, but that the decline in their business was fleeting. A 12-month rolling average of monthly revenues could serve as an appropriate benchmark against which monthly declines were assessed.
• Would recipients receiving relief be allowed to report higher annual profits if the tariffs were short-lived? Would businesses that lost U.S. sales but found substitute markets for their products still be eligible for subsidies?
• What about timely disclosure? My research shows that public corporations were more reluctant to disclose they had received CEWS if they increased their dividend payouts that same year. Lack of disclosure makes it difficult to evaluate the effectiveness of a subsidy and prevents governments and researchers from learning how to plan and prepare for the next economic crisis that may require wage subsidies.

Policymakers crafting relief programs for businesses and workers affected by any new U.S. tariffs must address shortcomings identified in the CEWS program. We need to make sure design flaws are not repeated and future programs are rolled out on a more solid foundation.