As the interminable trade negotiations between Canada and the United States continue, in the absence of inside information from being at the table, one is left with trying to figure out what is going on by relying on the snippets and reports that make their way into media stories. One of the most recent accounts as to where we are at in the Globe and Mail paints a picture of Canada that runs contrary to the public “elbows up” domestic rhetoric. Essentially, according to this report “Canada and the United States are negotiating a deal in which Ottawa would concede on a long list of Trump administration trade demands in exchange for some relief on sectoral tariffs, as talks intensify less than two weeks before another round of threatened American levies.” Indeed, the tendency towards concessions was noted in another less flattering Globe and Mail piece.
Essentially, Canada would remove its retaliatory tariffs, return U.S. alcohol to the shelves, agree to Washington’s views on dairy quotas and in return get lower tariffs on steel and aluminum, some relief on auto and forest product tariffs and avoid the August 19th tariff increases. However, there is going to be a baseline set of tariffs on all Canadian goods no matter what, which will be part of continuing negotiations into the fall and we are expected to make good on our purchase of F-35 fighter jets as well as make additional commitments to joint North American security which will inevitably involve more purchases of U.S. military goods. Any new United States-Mexico-Canada trade arrangement down the road will essentially be an assortment of separate managed deals as dictated by the United States united by a continued tariff albeit one that probably favours us relative to countries outside North America.
In some respects, one would have to say that we should not be surprised if this is the outcome. A country with 75 percent of its exports going to a single market does not have the leverage it might imagine unless it wants to play hardball on crucial exports like oil, gas, potash and electricity and the Prime Minister has already given up that card. Ultimately not using it is one thing but stating in advance that it will not be used is something else. The Americans want tariffs because they see them as both a way to onshore production as well as a potentially lucrative source of revenue. And whose exports are a better source of revenue than Canada and Mexico given the sheer volume of trade. The Americans will certainly not want to reduce their “tax base” by exempting either us or Mexico. As for the fact that tariffs on our goods are paid for by American consumers – well, it is a de facto consumption tax on Americans and if Americans want to avoid it, they can consume American products. From the Trumpian perspective it is a win-win situation despite the fact that the evidence to date suggests that this is not working as well as they would like.
Currently, what the Americans seem to be proposing is a world where they levy tariffs on us in terms of whatever goods they want and at whatever rate they choose while we continue to admit all their products tariff free as well as spend Canadian tax dollars on American military goods. After all of our elbows up rhetoric, this is the deal it would appear we are on the road to accepting. The real question is can we come up with a better approach? Obviously, the best approach is multilateral free trade given the shared economic and geographic space occupied by Canada, the US and Mexico but this is now not on the table.
I would have to venture once again that what Canada should pursue with the Americans is essentially a deal modelled in part on the 1854 Reciprocity Treaty. Both sides would let in raw natural resource and raw agricultural imports duty free. This would satisfy our commitments as reliable providers of the goods the Americans seem to want from us. It would also help keep food costs down for consumers on both sides. However, all imports of non-raw-natural resource and raw agricultural imports – anything value added - could have tariffs levied on them by either side. (For example, oil and natural gas duty free but gasoline and petroleum products could be tariffed. Milk duty free but butter and cheese can be tariffed) The rates can be jointly negotiated, or they can simply be left up to each side based on what they think their consumers can bear and what revenues each side thinks that they think they can get. It all sounds so very 19th century but these seem to be the times we are in.
Naturally, this is a not very good outcome but think back to the period between 1870 and 1930 when Canada had a much smaller domestic market and was behind a tariff wall. There was still economic growth and while growth in an environment of free trade would have been greater, it was not an available option. We now have a market of 40 million people and if we combine it with a set of tax reforms that lower corporate and personal income tax rates, that could help compensate for the higher costs imposed by tariffs on American imports. Add in further reductions of inter-provincial trade restrictions and we may actually achieve the internal common market that should have been brought into existence in 1867.
Freer trade with the United States was something that was achieved over several generations and when it worked it worked well for both sides. Again, it does not seem to be an available option. Think of it another way. If we simply accept an outcome whereby the Americans dictate all the terms and tariffs as well as well as continue to direct our military purchases towards their goods and then arbitrarily change the terms whenever they feel it is to their benefit, well in a sense you have indeed become the 51st state but without any of the benefits. If the Carney government negotiates a trade deal in which we essentially grant the Americans everything they want and we obtain only what they deign to grant us, then we will have negotiated an economic capitulation and Anschluss and not a trade agreement. The choice facing the Carney government is either a smaller and slower growing protectionist Canadian economy (which some might argue we have already partly achieved with the economic policies of the last decade) or Economic Anschluss with the Americans in which the Americans receive all the economic benefits of Canada as an American territory without any of the political costs.
