The United States under President Trump has taken yet another jab at Canada’s economy with the announcement of new 50 percent tariffs on range of goods. This is a negotiating tactic, designed to extract leverage in the upcoming negotiations but the move also sends important messages about the ultimate aims of the United States with respect to its relationship with Canada that we ignore at our peril.
If implemented, given that oil, gas, potash, fish and critical minerals are exempted, these tariffs will have little to no effect on Canada's resource sector and exports - which are about 40 percent of our exports to the USA. The duties are actually narrowly targeted at manufactured and consumer goods such as chemicals, plastics, electronics, alcohol, dairy and hockey sticks of all things. These are actually all together a relatively small portion of our exports to the United States. Auto parts - a crucial part of the integrated supply chain are also exempt – for the time being.
So, the overall impact on the macroeconomy would be relatively small but those specific targeted products would be relatively hard hit. Alberta and Saskatchewan are the least impacted. Ontario and Quebec are more heavily impacted. More importantly, these new tariffs are a violation of CUSMA and raise the question as to whether the United States can be relied upon to adhere to any deal even if struck entirely on their terms. Moreover, it is clear that the American version of a new Canada-U.S. trade agreement is not going to be what we are looking for.
The American negotiating vision is for deals with Canada and Mexico that emphasize their roles as input providers to the U.S. economy and value-added chains of production rather than trade partners and on terms always favouring the United States. In the case of Canada, our role in the American input chain is oil and gas (provided to them at a discount), as well as potash, critical minerals and any other resource product they require but that makes room for their producers first, such as lumber.
Despite the mutual gains from trade, they see our value added manufactured and consumer products as direct competition to American manufacturers given the similarity of the high-wage employment generated. Despite our ongoing attempts at trade diversification, our current dependency on the United States market for three quarters of our trade reduces our bargaining power.
In the case of Mexico, the American preference is also mainly for their resource products such as petroleum, minerals, and food and agricultural products but they will tolerate manufactured products such as electronics and medical devices and even auto parts made with cheaper Mexican labour - that of course stays on their side of the border. Canadian labour does not provide the American consumer market with cheap manufactured goods and so we are out of luck there.
It is unlikely that CUSMA is going to be renewed in its current form, and any future trade arrangement will see tariffs on Canadian goods that are both negotiated as well as imposed unilaterally on spur of the moment. The Americans seem to want the deal that they last got in 1854 under the Reciprocity Treaty whereby there was free trade in resource products and raw materials but continued tariffs on manufactured products – on both sides one should add. Oddly enough, the Americans ended that deal for an assortment of reasons including lobbying by American resource producers in what was then a more resource intensive United States, American perceptions that Canada benefitted more from the deal than they did (sometimes it seems nothing changes) and Britain’s tolerance for the Confederate side in the Civil War. Canadian merchants advocated joining the United States if they did not get a trade deal in 1854 but once it ended, Confederation and creation of an east-west economy behind a substantial tariff wall followed.
So, what are our options? Well, one option is simply to throw in the towel and give the Americans everything they want on their terms and hope that ends it and we get on with our lives. Of course, the resulting impact on the Canadian economy would be a return to a more resource intensive economy in terms of our exports and the loss of some employment in value added manufacturing and consumer goods production. Our auto sector would be smaller but after adjustment more competitive as would a lot of other small business manufacturers. Alberta, Saskatchewan and to a lesser extent the Atlantic region would be relatively unscathed. On the other hand, the remaining provinces would be hit hard.
Of course, that outcome qualitatively does not seem much different from a world where the Americans levy tariffs on all our non-resource exports to the United States and we levy tariffs on all of our non-resource imports from the United States. Oddly enough, this almost sounds like an updated version of the 1854 Reciprocity Treaty which in the end was abrogated by the Americans because they thought we derived greater benefits from it. Yet, President Trump does appear to be a 19th century thinker when it comes to trade and tariffs so maybe this is where we should go. Free trade in natural resource and agricultural products but tariffs of our choice on everything else would as in the 19th century protect smaller and less efficient Canadian producers – extensive as opposed to intensive economic growth.
The best outcome is one without tariffs and free trade between Canada and the United States and Mexico whose economies have a lot of complementarities and stand to gain substantially from freer trade. Alas, for that to happen it takes two willing partners to tango, and the Americans currently prefer not a tango or a pas de trois but more of a freestyle solo dance performance. If the Canadian economy was able to generate income and employment under a tariff regime when it was a small and dispersed market of 8 million people, surely it will survive a tariff trade world when it has a market of 40 million people. Will we have to get by with less? Sure. But, as a country, our declining productivity means that we have been getting by with less for a long time now. If it is any satisfaction, the Americans will also be poorer with tariffs.
