July 8, 2018
Trade War, What Is It Good For?
YOU ASK, WE ANSWER
“Hey ladies! I’m trying understand the point of this trade war (if that’s what it is?). What’s the point of all these tariffs if they’re going to damage the economy? I don’t understand the end goal. Thanks!”
– Jess, a wonderful reader from somewhere in Canada
Canadians share a lot with Americans: we live on two sides of the world’s longest undefended border, we’re proud brothers-in-arms who have fought (and continue to fight) in some of the world’s bloodiest wars, we both love Drake and The Weeknd, and we share an extensive history of trade agreements.
Reaching as far back as 1855, when Canada was still very much a British colony (something POTUS is a little confused about), Canada and the U.S. have shared a number of treaties and trade agreements — though we’ve cancelled and fought over them, too.
• 1855–1866: The Reciprocity Treaty, which outlined free trade between British North America and the United States of America.
• 1935–1980: Canada and the U.S. negotiated a number of bilateral trade agreements in order to reduce tariffs in both nations.
• 1960s: The most important of the aforementioned agreements was the Automotive Products Trade Agreement (a.k.a. the Auto Pact) which removed all tariffs on cars, buses, trucks, tires, and automotive parts in both countries.
• 1988–1994: Then came the Free Trade Agreement, which liberalized trade between Canada and the U.S., effectively removing most remaining tariffs.
• 1994–2018: And finally, NAFTA, which eliminated remaining barriers to trade and investment between Canada, the U.S., and Mexico.
Before we get into this whole trade debacle, there’s one main thing that everyone has to understand: what, exactly, are tariffs? And how do they differ from taxes and duties?
• A tariff is a type of duty that’s charged on a particular class or set of imports or exports (like customs duties for trade purposes).
• A tax is a contribution to government revenue paid on an individual, proprietorial, or professional basis.
• A duty is a contribution to the public revenue of a country enforced by law on the sale and manufacture of goods and services.
PLAYING NICE WITH NAFTA
The key differences between NAFTA and its parent agreement, the FTA, can be divided into four categories: intellectual property, environment, agriculture, and transportation infrastructure. (That, and the fact that Canada and the United States finally decided to let Mexico play ball.)
From movie copyright laws to a joint promise of environmental protection (to which President Trump has basically said, “LOL”), NAFTA is essentially a modernized and more inclusive version of the FTA.
It also embodies an attitude of partnership and cooperation, but three’s a crowd: agriculture was (and still is) the most contested topic within NAFTA and has resulted in three separate agreements, with the Canada-U.S. agreement containing significant restrictions and tariffs (mainly on sugar, dairy, and poultry) in comparison to the Mexico-U.S. agreement which is much more liberal (for now — we’re betting a border wall might change that).
WE’RE NOT IN KANSAS ANYMORE
Agriculture aside, attitudes between the three NAFTA nations seemed fine and dandy until America’s 2016 presidential election – which is not to say that NAFTA was without its disputes before then, but nobody was threatening to send it to the chopping block.
Until President Trump, that is.
In his 60 Minutes interview back in the halcyon days, then-candidate Trump said of the NAFTA agreement, “We will either renegotiate it or we will break it.”
President Trump was elected and the renegotiations started immediately. However, the changes that Trump requested way back in July 2017 fell in line with his “America First” and “Make America Great Again” campaign spiels, which would have made NAFTA a lot less of a free trade/mutually beneficial agreement, and much more of an “America gets all the perks” agreement.
As senior fellow at the Peterson Institute for International Economics Chad Bown has said, “It is very consistent with the president’s stance on liking trade barriers, liking protectionism.” It also seems as if Trump is trying to send trade messages beyond the North American border (particularly to China) by scapegoating Canada and Mexico. And while he’s been very clear on wanting to make changes, he hasn’t been consistent regarding how he wants to do that, leaving Canada, Mexico, and the rest of the world pretty confused.
“A number of the proposals that the United States has put on the table have little or no support from the U.S. business or agriculture community [sic]. It isn’t clear who they’re intended to benefit,” said the vice-president of the U.S. Chamber of Commerce, John Murphy. “Renegotiation” has quickly transformed into an “our way or the highway” discussion since the U.S. is demanding a five-year sunset clause(which means the agreement has to be re-agreed to every five years or it will become null and void), which would essentially end the agreement since Canada and Mexico have both said that would be a dealbreaker for them.
Well besides the fact that the U.S. elected a president who very clearly believes in protectionist policies, there are other theories that Canada and Mexico are just scapegoats in the United States’ larger trade plans.
It’s not just Bown and Murphy. Experts around the world also suspect that the main target is actually China. It’s a country that’s “almost universally acknowledged to engage in unfair competitive practices” regarding trade, so anyone can understand why a new administration would want to change its approach.
This theory was all but confirmed in June 2018, when President Trump slammed China with billions of dollars in tariffs. The problem – scapegoating aside – is that Trump simply doesn’t understand the complexities of international trade (e.g., “trade wars are good, and easy to win.).
As one political writer put it, “[Trump’s] priority is not negotiating, but fighting.” He’s never considered the politics of the countries he’s “fighting” against, where his all-or-nothing trade demands are not in his partners’ benefit. In fact, Canada and the EU could have supported Trump in calling out China and demanding it make changes to its trade practices. Canada and the EU have similar pain points when it comes to China’s trade policies, but Trump ignored that opportunity for another “America First” approach that will actually be to his own detriment.
KARMA’S A B*TCH
“America First”? Try “America Last.”
Rather than boosting the economy (as Trump likes to promise pulling out of NAFTA will do), the U.S. will instead see reduced access to their (current) biggest export markets, reduced economic growth, and an increased cost for gasoline, cars, fruits, and vegetables.
Not only that, but with Trump lashing out at both Canada and the EU (with whom the U.S. shares a $1.2 trillion trade partnership), repercussions could result in a total derailment of the still-recovering world economy. Looking at the United States’ relationship with the EU in particular, the current tariffs being rallied on both sides will significantly harm the gigantic U.S. auto industry; the U.S. is home to more than 300 German automotive facilities and it employs more than 120,000 American citizens.
WHAT ABOUT US?
Well, contrary to Trump’s opinion, this trade sitch is not a one-way street. The United States benefits from free trade with Canada just as much as we benefit from trading with them. So at the beginning of June, when Trump slapped tariffs on aluminum and steel on the United States’ long-time trading partners, Canada responded with $16.6 billion in retaliatory tariffs on American goods, including steel and aluminum; yogurt, coffee, chicken, beef, chocolate, strawberry jam, ketchup, and other food items; hair lacquer, shaving products, and other personal care products; wood, paper, and cardboard; and plenty more. The real dealbreaker: maple syrup. (Checkmate.)
All this isn’t to say that Canada will walk away unharmed from Trump’s trade war. Many household goods that we probably take for granted are about to jump in price. (Think toilet paper and dishwasher detergent.) Those with lower incomes will of course be hardest hit, and this whole debacle will really shake you to your core when we say this: the last trade war between Canada and the United States was during the Great Depression of the 1930s.
Business within the aluminum and steel markets will also suffer from the double whammy of both the Canadian and the American tariffs. Many industries will see their businesses shut down and their job opportunities disappear. Prime Minister Justin Trudeau has been meeting with industry professionals to offer his support and figure out if (and how) the government can help during this tumultuous time.
THE SILVER LINING
However, there are benefits of a trade war for Canadian owned-and-operated businesses, as the high cost of imports could drive consumers to Canadian retailers.
“[T]he current political climate is educating customers to check their labels and choose ‘Made in Canada’ where possible,” said Mike Gettis, CEO of Canadian-based mattress company Endy, whose direct competitor is New York-based Casper. However, don’t expect drastic price-shock: the 10% tariff on household goods only applies to wholesale prices, not retail – another reason to shop your local grocer instead of places like Costco, for the time being.
And for those hoping for an end to the Trump presidency, the Canadian government evidently has your back – the products that Ottawa has placed tariffs on are mostly coming from politically sensitive states, which means these tariffs could have a significant political impact this November. So perhaps America will actually trade him in for a newer (and saner) model.
Have a question you want answered? Email us at firstname.lastname@example.org to let us know, and it could be the subject of the next “Long Shot.”