Canada hits US with retaliatory tariffs

Canada is the latest country to retaliate against the Trump administration's steel and aluminum tariffs. The Canadian tariffs are intended to cause political pain for Republican-controlled states and districts.

Background

The United States has a history of tariffs dating back to the 1700s. In 2002, tariffs imposed by Bush were thought to have cost the country 200,000 manufacturing jobs. They were lifted a mere 21 months after their imposition. In 2009, Obama imposed a 35% tariff on Chinese tires after lobbying from American companies. This reportedly saved over 1000 jobs. However, some studies have shown that the tariff cost the country $2 billion in total, including a retaliatory ban on American chicken parts by China.

President Trump is known to have a protectionist outlook on trade. On the campaign trail, he promised tariffs against countries such as China, whom he blamed for loss of jobs. He also criticized “bad” trade deals and “unfair trade practices” against America. He said that other countries were "dumping vast amounts of steel all over the United States, which essentially is killing our steelworkers and steel companies”.

Since taking office, Trump has withdrawn from the Trans-Pacific Partnership, and initiated the renegotiation of the North Atlantic Free Trade Agreement. In recent months, experts have begun sounding the alarm about an impending trade war between US and China, the two largest economies in the world. These fears solidified in March, when Trump announced global import tariffs of 25% on steel and 10% on aluminum. The President cited “national security” in order to circumvent WTO commitments. Since then, tensions have escalated. The US has imposed tariffs worth over $150 billion; Beijing responded with $50 billion worth of tariffs. Read more on the US-China trade war here.

The US is highly reliant on steel imports. American steel production has fallen from 112m tons to 86.5m tons since 2000. Employment provided by the industry has fallen from 135,000 jobs to 83,600 jobs. Canada is the United States’ biggest steel exporter at 16%, followed by Brazil, South Korea, and Mexico. Japan is 7th and India is 10th.

Analysis

Canada introduced retaliatory tariffs against the United States in response to the Trump administration's duties on Canadian steel and aluminum. "Canada has no choice but to retaliate in a measured, reciprocal, dollar-for-dollar response," Canadian Foreign Affairs Minister Chrystia Freeland stated. The Canadian government also announced $1.5 billion in subsidies for its steel and aluminum industry.

The $12.6 billion (CA$16 billion, €10.8 billion) in tariffs will hit US steel and aluminum, as well as more than 250 other products. This comprises duties on US maple syrup, whiskey, orange juice, toilet paper, yogurt, and ketchup. The tariffs will come into effect on July 1, and most of the items will be taxed at rates of 10% or 25%.

Many of the goods chosen were aimed at making a political impact ahead of US mid-term elections in November, targeting Republican-held states and congressional districts. Freeland mentioned there was no reason for the Trump administration to escalate the trade dispute. She added that Canada would not back down in the face of American violations of WTO and NAFTA trade rules. She also said Canada was in discussions with Mexico and allies in Europe, which have also retaliated against the US imposition in June of 10% tariffs on aluminum and 25% on steel.

The Trump administration imposed the steel and aluminum tariffs citing "national security" provisions of US trade law, creating a reproach from US allies. Canada, Europe, and Mexico fear that the Trump administration could follow through on threats to impose tariffs on automobile imports.

After the EU and China, Canada is the United States' largest trading partner. The two countries traded $673.9 billion worth of goods and services in 2017, with the US running a small $8.4 billion surplus, according to the Office of the US Trade Representative.

Assessment

Our assessment is that such a move by US allies would disrupt supply lines, negatively impact the automobile industry, and trigger an economic recession. We believe that if other nations such as Mexico and EU respond similarly, it could result in a full-blown trade war. As stated previously, we believe that a trade war would be devastating to the global economy.