TRADE WARS: A Dangerous Economic Showdown With No End in Sight

By Angus Gillespie

The allied relationship between Canada and the United States is one that extends all the way back to our Confederation more than 150 years ago. The two countries share many commonalities, including cultural similarities, and a free democratic society not to mention the longest undefended international border in the world. Sure, the two sides sometimes bicker in much the same manner you’d expect from two siblings, but it’s never come to anything serious that couldn’t be resolved. However, it can’t be overstated how the implementation of harsh tariffs brought forth by United States on many of its closest allies – including Canada – could quickly lead to a spiraling economic downturn that could unleash devastating global economic effects throughout the world.

The Trump administration seems to want to pick a fight with just about every nation it focuses its attention on but it’s the escalating trade war with Canada that has caught virtually everyone by surprise. The dispute has taken on a life of its own and unless it’s controlled soon, there’s no telling where it all might end. It sounds ominous, and for some business industries it definitely will be, unless cooler heads prevail and a rational plan is unveiled moving forward.

Canada is an exporting nation, plain and simple. Despite having the luxuries afforded to most leading developed western nations, it would be foolish to deny that we depend upon selling our goods to other nations in order to continue with the lifestyle we’ve become accustomed to for decades now. There is not the population or an internal economic infrastructure in place to keep ourselves self-sustaining. That is why it is so concerning when this country’s primary trading partner invokes such harsh penalties.

Many people on both sides of the border are still shaking their heads in disbelief after U.S. President Donald Trump called Canada a threat to U.S. national security. If that wasn’t insulting enough, the immature war of words may have hit an all-time low when Trump actually took to Twitter about his dismay regarding the scourge of Canadians crossing the border and buying new shoes at U.S. retail stores, and then apparently filling all the garbage cans with their old, worn-out ratty shoes with nothing to declare at the border upon returning to Canada. Don’t forget the cheaper tank of gas as well. Yes, it’s degraded to arguing about old running shoes in a garbage can and whether your car came back to Canada with more gasoline that it left with. Cases of beer? Let’s not even go there.

After months of blustering about his disdain for NAFTA, and thus far a failure to renegotiate a new accord between Canada, the U.S. and Mexico, President Trump ratcheted up the stakes by imposing harsh tariffs on steel and aluminum against many countries. In the beginning, Canada, Mexico and the European Union received temporary exemptions, but that came to an end when the U.S. administration announced that they too would feel the wrath of America’s new agenda. Imported steel now carries a 25% added tax burden and aluminum got slapped with a 10% surcharge. This immediately affects a number of industries, including the automotive sector. Hamilton, for decades known as ‘Steel Town’ is on pins and needles, waiting to see how all of this will eventually play out.

Representatives of the steel industry, auto parts makers, auto dealers and the steelworkers unions all say that the tariffs could definitely send the Canadian economy into a recessionary tailspin.

Government Response

In response to America’s decision to put up a wall of tariffs, the House of Commons trade committee has held numerous emergency meetings in Ottawa to try and ascertain just how widespread the economic ramifications could be if these tariffs – and perhaps others – become permanent.

There isn’t a Member of Parliament from any riding in Canada who hasn’t heard from concerned constituents about what the future holds for a number of manufacturing industries, including the looming threat of similar harsh taxes being imposed on Canadian-made automobiles and auto parts that are shipped to the U.S. for sale.

Each year manufacturing sales in automotive industries can be worth as much as $90 billion. The sector reached a peak of almost $112 billion in sales in 1999 before trending downward from 2000 to 2007. The automotive sector employs about 115,000 people here in Canada, representing almost 8% of all manufacturing jobs in the country. Of this total, 64,300 employees were in parts manufacturing, 37,200 were in motor vehicle manufacturing and the remaining 13,600 were in motor vehicle body and trailer manufacturing. The majority of the sector’s jobs were located in Ontario. Suffice to say, a 25% tariff on all automobiles sent south of the border would be a crushing blow that would assuredly lead to thousands of job losses. Most Canadian production is exported, almost exclusively to the United States, which accounts for 97% of all Canadian automotive exports. As of now, there are no other viable alternative markets. It’s the U.S. or nothing.

Dumbfounded that our closest trading partner would impose such harsh restrictions on our products, the Canadian government announced it would hit back with its own retaliatory levies. Ken Neumann, Canadian director of the United Steelworkers, says Canada’s tariffs should have gone into effect the same day as the American levies, which would have sent a strong message that Canada won’t be bullied.

These are unprecedented times that nobody could have envisioned just two short years ago. Those who stand by the decisions of the Trump administration and the “America First” mantra say they are looking to preserve American jobs. That as a general statement is understandable. However, it’s not altogether practical. As influential as the U.S. happens to be in the international trading world, even America needs trading partners or sectors of its economy will also take a massive hit. That seems to be a gamble President Trump is willing to take in order to get what he wants.

U.S. government officials are finishing an in-depth study on imposing tariffs on automobiles from Canada and the EU, which Trump claims have taken advantage of the U.S. for too long.

As a part of an immediate response, finance ministers from across the country weighed the consequences of Canada’s current situation and possibly how much worse it could become if the trade dispute continues to intensify. What appeared to be nothing more than blustering south of the border six months ago has now evolved into a full-blown hurricane and Canada is caught in the crosshairs.

In the absence of any other identifiable options, Ottawa released a list of dozens of products that it intends to target in retaliation. But Federal Finance Minister Bill Morneau said it is unclear what will remain on the list and what may be added or subtracted. The initial itemized list of products targeted includes: steel and aluminum (ironically), orange juice, maple syrup, whiskey, toilet paper and a number of other smaller products.

“We are in the process of doing our homework and that’s very important to have an approach that works,” Morneau said after his meeting with the federal, provincial and territorial finance ministers.

“We are in the midst of completing our deliberations and we’ll have more to say about the tariffs and our responses soon,” continued Morneau.

To some the Canadian response doesn’t seem like it is overtly hard-hitting, but the truth of the matter is Canada doesn’t have the same firepower to blast back at the U.S. in an ongoing battle. It is Trump’s assertion that he wants to close massive trade deficits with countries such as Canada and China as well as many nations in the European Union. Whether one agrees or disagrees with Trump’s position, doing so with all the grace of a bull in a China shop is not the best way to develop strong relationships.

There are concerns Trump could retaliate against Ottawa’s countermeasures much the same way he did with China. Originally there were $60 billion in tariffs imposed on the world’s most populous nation, but when China retaliated with the same amount against the U.S., Trump’s immediate response was to tack on another $200 billion in tariffs for Chinese imports.

The American president has repeatedly warned he could apply tariffs on autos – which would undoubtedly lead to chaos for the Canadian economy. Asked if he’s worried an escalation in the trade battle could trigger a recession, Morneau said the economy is in good shape. But that wasn’t the question. Yes, the economy is okay – for now. But it certainly won’t be if the automotive industry is whacked as hard as some fear it may be.

“There is always a concern that if there’s a change in the level of trade that there will be a bigger problem,” said Morneau when pressed further on the matter.

Following the meeting, British Columbia Finance Minister Carole James said regardless of what happens at the national level her province will continue to try to strengthen its trade relationships with the individual American states.

“I think everybody’s waiting to see the list that will come out of the countervailing tariffs,” James said.

A number of financial analysts and experts have told a special parliamentary committee that they support Canada’s retaliatory tariffs. However, they are also expressing deep concerns about the economic damage that could result from a larger trade fight with the U.S., because it’s one that Canada quite frankly cannot win.

Morneau has pledged federal support for Canadians entangled by the trade dispute, but thus far has offered up no specifics.

Quebec Finance Minister Carlos Leitao said his province would also provide packages to help industries and workers that will be negatively impacted by the tariffs.

The federal, provincial and territorial governments have maintained a common front in dealing with Trump’s protectionist policies, which includes the difficult renegotiation of the North American Free Trade Agreement.

It’s important for Canada to stand its ground and to speak with one voice on the tariff dispute, Manitoba Finance Minister Cameron Friesen said. But when it comes to retaliatory measures, he urged the feds to proceed cautiously.

“I think that if I had a message for the federal government, it would be look before you leap in terms of retaliatory measures,” cautioned Friesen.

The finance ministers also heard a presentation from David MacNaughton, Canada’s Ambassador to the U.S., about the current state of the neighbours’ relationship. It’s been well documented that Canada, the U.S. and Mexico have been engaged in a seemingly never-ending and exceedingly hostile negotiation process regarding NAFTA. In fact, it’s deteriorated to the point that Trump and Prime Minister Justin Trudeau are now exchanging verbal jabs with one another through the media, and on Twitter in Trump’s case.

The tariff dispute, along with the unknowns tied to NAFTA, has created significant uncertainty for Canadian businesses. There is also the concern that investment opportunities will simply go elsewhere if it’s felt the U.S.-Canada argument cannot be settled amicably, and soon.

“In this environment of a quasi-trade war… the first victim is always investment,” Leitao said.

Quebec is also setting aside a budget to encourage investment. It is not known whether the federal government will be providing monetary assistance to enhance that initiative.

The ministers also heard from Bank of Canada governor Stephen Poloz about the state of the economy. The main concern from those discussions focused on Canada’s ability to remain competitive on an international level. The potential impacts connected to substantial U.S. corporate tax cuts earlier this year are also being closely monitored. Various business associations believe the U.S. tax changes could cause more damage to the Canadian economy than the termination of NAFTA. It is unclear whether Morneau will respond in kind and lower Canada’s corporate tax rate.

U.S. Will Feel Economic Pain

Two major auto trade groups have repeatedly warned the Trump administration that imposing up to 25% tariffs on imported vehicles would cost hundreds of thousands of jobs related to the automotive sector and would result in skyrocketing prices on vehicles and possibly weaken research and development spending on electric and self-driving cars.

A coalition representing major foreign automakers including Toyota, Volkswagen and Hyundai said the tariffs would most assuredly cause harm to American automakers and U.S. consumers.

“The greatest threat to the U.S. automotive industry at this time is the possibility the administration will impose duties on imports in connection with this investigation,” wrote the Association of Global Automakers. “Such duties would raise prices for American consumers, limit their choices, and suppress sales and U.S. production of vehicles.”

Rather than creating jobs, the group says additional tariffs would result in the loss of hundreds of thousands of American jobs producing and selling cars, SUVs, trucks and auto parts. But that hasn’t deterred Trump, who is adamant that he will impose 20-25% tariffs on all imports of Canadian and EU-assembled vehicles and says the changes are coming sooner than later.

The Alliance of Automobile Manufacturers, representing General Motors, Ford, Daimler, Toyota and others, has also urged the U.S. government not to continue down this dangerous path.

“We believe the resulting impact of tariffs on imported vehicles and vehicle components will ultimately harm U.S. economic security and weaken our national security,” the group wrote, calling the tariffs a “mistake” and adding imposing them “could very well set a dangerous precedent that other nations could use to protect their local market from foreign competition.”

Analysis of last year’s auto sales data showed a 25% tariff on imported vehicles would result in an average price increase of $5,800, which would boost costs to consumers by nearly $45 billion annually.

Both automotive trade groups cited a study by the Peterson Institute for International Economics that the cost to U.S. jobs from the import duties would be 195,000 jobs and could be as high as 625,000 jobs if other countries and regions such as Canada, the European Union and Asia retaliate – as they certainly will.

Trump has made the seemingly endless tariffs a main staple of his economic agenda. He is apparently most annoyed by the particularly large trade deficit with Germany and Japan. Some financial experts believe he has added Canada and Mexico into the dispute as a means of gaining more concessions in ongoing talks to renegotiate NAFTA. Trump has also said he prefers to move forward with bilateral agreements with Canada and Mexico, negotiating separately with each country.

In 1941, there were 31 manufacturing facilities in the U.S producing fewer than four million vehicles. In 2018, the U.S. has 45 assembly plants, operated by both U.S. and foreign automakers. Those plants produced nearly 12 million vehicles last year.

While there is no denying many Americans either quietly or vocally support President Trump, millions more do not, and he is facing a huge backlash in his own country. The most recent casualty appears to be the announcement by iconic motorcycle maker Harley-Davidson and its corporate decision to shift some of its production overseas.

Upon hearing the news of Harley’s plans, Trump immediately took to Twitter to say the company was using his tariffs as an excuse but was going to move the jobs to Asia anyhow. However, the Milwaukee-based company responded by saying the moves were in fact to do with retaliatory tariffs that it will face in dealing with other countries that purchase their motorcycles. In other words, it will be easier to set up shop in certain foreign countries as a means of bypassing the tariffs they are imposing on the U.S. and goods it imports to those nations.

Trump, never one to back down, warned Harley-Davidson that any shift in production “will be the beginning of the end.” The president has held up the iconic American motorcycle maker as an example of a U.S. business harmed by trade barriers in other countries, but Harley-Davidson had warned that tariffs could negatively impact its sales outside of the U.S.

And let’s not forget China in all of this. Each week Trump keeps adding to the threats of more tariffs to the point it’s now exceeding $200 billion. Through all the fireworks Trump claims he’s actually getting other countries to come to the table to reduce or eliminate their tariffs and open up their markets. There is no doubt that China has been a prime offender in that regard.

Softwood Lumber Dispute

No trade disagreement between Canada and the U.S. could be discussed without eventually coming to the biggest thorn of them all – the softwood lumber dispute. The conflict was initiated in 1982 and its effects are still noticeable today. It’s estimated the fight has cost about 10,000 jobs in B.C., mostly between 2004 and 2010.

For years the U.S. government has complained that the Canadian lumber industry is unfairly subsidized by federal and provincial governments. The prices charged to harvest the timber are set administratively, rather than through the competitive marketplace, which is how the U.S. operates.

The Canadian government and lumber industry disagree with the U.S. government’s contention of unfair practices. The softwood lumber industry employs about 240,000 Canadians, those who are both directly and indirectly involved. The value of the lumber industry is estimated at almost $25 billion, which accounts for about 1.5% of the gross domestic product. As of this point, Canadian producers have full access to U.S. markets, but with everything else that is going on regarding tariffs and trade imbalances, it’s anything but certain this will not soon become the focus of the U.S. government once again.

It’s astounding to see how one individual has been able to cause so much consternation between two allied countries – and he’s not done yet.

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