Way back in 2016, it was possible to believe that Donald Trump might be a rational trade warrior. The President, it was hoped, would only use the threat of protectionism to push for lower trade barriers. And he would focus on China, an unfair trader that deserves American trade opprobrium, and Mexico, which does not.
And Canada? Canada wouldn’t be in the crosshairs. In an election campaign during which Mr. Trump invoked all the bogeyman foreigners he was going to put in their place, Canada was never mentioned.
Yet here we are, in the summer of 2018, at the beginning of what may be a trade war with our best friend. Some of what Mr. Trump is doing is about pressuring Canada and Mexico in the North American free-trade treaty renegotiations. But it increasingly looks like he’s after something bigger: namely, deconstructing the post-war global trading regime.
How should the Trudeau government respond?
Hang together, or hang separately: The good news is that, so far, this looks nothing like the generalized beggar-thy-neighbour tariff war that overtook the world during the Great Depression. Instead, Mr. Trump has picked a fight with the entire Western alliance. The G6 and countries like Mexico are on one side, and the U.S. is alone on the other. The latter has levied tariffs on all of them and threatened more; the former have responded, solely against the U.S.
Mr. Trump has, in other words, created a global, multilateral alliance against himself. It’s exactly what Canada needs. Ottawa must cultivate that alliance – the G6 and Friends – to ensure that America’s major trading partners are coordinating their responses to Mr. Trump’s trade actions. Hanging together may be the best hope of de-escalating a trade war.
Keep the Two Amigos: If NAFTA is killed by Mr. Trump, it makes sense for Ottawa to maintain it as a Mexico-Canada deal. Trade between the two countries has grown significantly over the last two decades, particularly in cars and car parts. The supply chain has gone continental, with a vehicle under assembly moving across borders multiple times on its journey to becoming a finished product. If Mr. Trump uses tariffs to dismantle that integration, Canada and Mexico – and their orphaned auto industries – are going to need one another.
Retaliate carefully: Mr. Trump’s tariffs on Canadian steel and aluminum are not just bad for Canada. They’re bad for Americans, too. The targeted Canadian goods are mostly inputs into American manufactured products, which means Mr. Trump is raising costs for American businesses. Ottawa has to be smarter in response.
In its first round of retaliation, the Trudeau government wisely imposed tariffs on a long list of goods for which there are Canadian or foreign substitutes – laundry machines, chocolate, lawnmowers, whiskey – with the goal of harming American producers more than Canadian consumers. The list also targeted key Congressional leaders, like Senate majority leader Mitch McConnell of Kentucky, the home of bourbon whiskey.
But what if the tariff war spreads and grows? Tariffs don’t make a lot of sense when they just raise prices on Canadians, or make it costlier for Canadian industry to buy manufacturing inputs. The more Mr. Trump builds tariff walls, the more it hurts our economy. Ottawa has to ensure that, when it returns fire, it isn’t just shooting Canada in the foot.
If this war drags on for years, some American tariffs may not warrant an equivalent response. If Washington chooses to effectively punish American consumers, Ottawa doesn’t have to retaliate by punishing Canadians.
Aid the wounded: The transition from our low-tariff present to a higher-tariff future, if that’s where the world is headed, will be wrenching. If tariffs go high enough, it will mean a Canadian recession and a major restructuring of formerly integrated industries like automotive.
If that happens, Canadian governments are going to have to spend more to smooth the way through a difficult transition period, in particular to assist those who will eventually get new jobs, but whose old jobs are not coming back. If the worst comes to pass, the idea of speedy returns to balanced budgets in Ottawa and Ontario – the province likely to take the hardest hit – will have to be shelved.
But the Canadian economy won’t collapse, even if the U.S. builds tall and permanent tariff walls. The economy will find a new equilibrium, albeit one that is less efficient, leaving us all – Americans and Canadians – a bit poorer.