World hurtling toward all-out trade war over Trump tariffs, threats of retaliation

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The world is hurtling toward an all-out trade war over U.S. President Donald Trump's planned tariffs on steel and aluminum, with major trading countries ratcheting up threats of retaliation as Mr. Trump dares them to fight.

Such a confrontation threatens to pit the United States against allies and rivals alike, hitting global supply chains, jacking up prices for consumers, complicating the renegotiation of the North American free-trade agreement and setting up a fight at the World Trade Organization.

Meanwhile, Canada – the United States's largest supplier of both metals – said it would keep lobbying for an exemption to the tariffs, arguing it is a key part of the supply chain for the U.S. military and also buys more steel from the U.S. than it sells.

Mr. Trump made the announcement Thursday, saying he will unveil tariffs next week of 25 per cent on imports of steel and 10 per cent on aluminum in a bid to protect domestic producers. The President is using a provision of U.S. trade law that allows him to cut imports for national security reasons.

While the move is nominally aimed at China, a global tariff would disproportionately punish Canada and also hit other U.S. friends, including Mexico and the European Union. It would be the latest in a string of trade fights between Canada and its largest trading partner over the past year, following disputes over softwood lumber, the Bombardier C Series airplane and the NAFTA overhaul.

On Friday morning, Mr. Trump said he would welcome a trade war if America's trading partners fought back against the tariffs.

"When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win," he tweeted.

While tariffs have long been contemplated by the President, who won election by blaming other countries for taking U.S. industrial jobs, the announcement itself was abrupt. The White House offered no further details on how the tariffs would be applied or whether any countries would be exempted.

Sources in the Canadian government and U.S. steel industry said they did not have a firm answer from the Trump administration on whether Canada would be hit with tariffs. One steel source said Mr. Trump was "freestyling" when he made the announcement and had not worked out the details. Even U.S. Commerce Secretary Wilbur Ross, the point man on the steel file, appeared to be in the dark: On Friday, he told CNBC only that Mr. Trump "seemed" to have announced broad tariffs hitting every country.

Prime Minister Justin Trudeau seized on that opening, contending Canada should not face tariffs because it's a key military ally and buys billions more in steel from the United States – accounting for more than half of its international exports – than it ships to American buyers.

"The United States has a US$2-billion surplus on steel with us," Mr. Trudeau said in central Ontario. "So we regard the imposition of any tariffs on steel or aluminum between our two countries as absolutely unacceptable."

Canada is America's largest supplier of steel and provides 42 per cent of its aluminum.

Foreign Affairs Minister Chrystia Freeland said Thursday that Canada would strike back if hit with tariffs, with unspecified "responsive measures to defend its trade interests."

The European Union, for its part, said it would place targeted tariffs on U.S. goods, aimed at putting maximum pressure on Washington. These would include Harley-Davidson motorcycles, whose head office is in House Speaker Paul Ryan's home state of Wisconsin; Kentucky bourbon, from Senate Majority Leader Mitch McConnell's state; oranges from the swing state of Florida; and Levi's jeans. The EU as a whole sells roughly US$6.5-billion worth of steel products to the United States – about 21 per cent of imports.

One of China's largest industry groups on Friday labelled Mr. Trump's announcement a "stupid trade protection measure," as markets in Japan, Hong Kong and Shanghai retreated. China makes roughly half the world's aluminum and steel, of which only 1 per cent is exported to the United States. More Chinese steel, however, is believed to make its way to America indirectly, through other countries. China is also the U.S.'s fourth-largest aluminum supplier, with 9 per cent of the total.

Now, the fight is on to determine whether Washington will strike the entire world with tariffs or train them more narrowly on China. On one side are the economic nationalists in the administration, including Mr. Ross and U.S. Trade Representative Robert Lighthizer; on the other are U.S. companies that use steel and aluminum in production, sundry congressional Republicans and free-trade supporters in the White House, led by economic chief Gary Cohn.

Daniel Ujczo, an Ohio-based trade lawyer with clients in the manufacturing sector, said there is a strong political imperative for Mr. Trump to take action on steel and aluminum to satisfy his supporters in the manufacturing belt. But he said he believed the White House could be persuaded to spare Canada; the key will be trade unions and Democrats in the Midwest who support tariffs making the case that Canada is not a problem.

"I do think we'll see a more tailored approach over the next week. The question is: How do you provide the President a way to walk back his broad-based statements from yesterday?" Mr. Ujczo said. "This is the No. 1 priority for Trump voters from both sides of the aisle."

If Mr. Trump plows ahead with broad tariffs, higher prices will slam everyone from auto makers to airplane manufacturers to breweries that sell beer in aluminum cans.

"If implemented, the tariffs will likely lead to significant increases in steel and aluminum prices in the United States, which will hurt domestic industrial manufacturers that rely on these commodities as key raw materials in production," said David Berge, a Moody's senior vice-president, on Friday.

If the trade action results in a WTO case, any ruling could be dangerous, said Chad Bown, a former trade adviser in Barack Obama's White House: Rule against Mr. Trump and it could push the U.S. further away from the WTO; rule in his favour and it would open the door to other countries using national security as a pretext for adopting protectionist trade policies. "It's basically the lose-lose scenario whoever wins," Mr. Bown said.

The tariff psychodrama also threatens to further complicate contentious NAFTA talks. Canada and Mexico are fighting a series of protectionist U.S. demands, including on North American and U.S. content requirements in autos. The tariffs could make those content requirements even more difficult.

Jerry Dias, the head of Canada's largest private-sector union, said Canadian negotiators are "completely frustrated" and that negotiations had "taken a step backwards" following the tariff announcement.

"It's difficult to bargain when you are constantly under a threat," Mr. Dias told reporters Friday after emerging from a meeting with Canadian chief negotiator Steve Verheul in Mexico City at the seventh round of talks.

With files from Nathan VanderKlippe in Beijing and Greg Keenan in Toronto