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Republican presidential nominee former U.S. President Donald Trump arrives at a campaign rally at the Butler Farm Show, on Oct. 5, in Butler, Pa.Evan Vucci/The Associated Press
Donald Trump is promising to impose tariffs of 10 to 20 per cent on all goods imported to the United States if he returns to the White House. On some products, he is threatening steeper levies, including up to 200 per cent for Mexican-made cars. And in just two years’ time, the USMCA pact that governs North American trade will come up for review, offering Mr. Trump another opportunity to demand tougher trade barriers.
All of this would deal a serious blow to Canada’s economy, causing a drop in exports, job losses and a global trade war.
So far, Mr. Trump has offered no indication that he would exempt American allies from his plans. Instead, he has repeatedly upped the ante.
“If you don’t make your product here, then you will have to pay a tariff, a very substantial tariff, when you send your product into the United States,” the former president and Republican presidential nominee warned in an economic policy speech in Savannah, Ga., last month. “We’re going to take their factories.”
While Kamala Harris, Mr. Trump’s Democratic rival, isn’t setting off similar paroxysms in Ottawa, the Vice-President has signalled she would continue the current administration’s policy of doling out government subsidies to U.S. manufacturing companies. It’s a program that has already proven expensive for Canada to match.
It all portends rough waters for Canadian trade after the world’s largest economy chooses its next leader on Nov. 5.
The cost of tariffs
According to an estimate by the Canadian Chamber of Commerce, a 10 per cent tariff on all imports to the U.S., followed by a likely global trade war, would result in a $45-billion hit to Canada’s economy. This would translate into more than $1,100 of lost annual income per Canadian.
Some sectors would be particularly hard hit. Oil, gas and mining exports to the U.S. would drop by more than 40 per cent, the chamber’s modelling shows. Canada’s auto sector would see a decline in exports to the U.S. of 20 per cent.
“The U.S. would be, by definition, poking its trading partners in the eyes. It would be weakening its friends,” said Matthew Holmes, the chamber’s senior vice-president for policy and government relations. “We can’t really predict what Trump would do if he’s in power. He certainly doesn’t allow facts to get in the way of his feelings.”
A report by Desjardins Securities this week calculated that, if Mr. Trump wins and Republicans control both houses of Congress, Canada’s real GDP could be as much as 1.7 per cent lower by the end of 2028 than if Ms. Harris is elected. “While a recession may be narrowly avoided, it can’t be ruled out,” the report said.
Imposing across-the-board tariffs would also hurt the U.S. economy. The levies would be paid for by companies importing goods into the U.S., and then passed on to American consumers. Also, much continental trade is not in finished goods, but in industrial inputs. Canadian auto parts, metal and oil, for instance, help U.S. factories make products more cost-effectively.
None of this has cooled Mr. Trump’s ardour. He continues to incorrectly claim that foreign governments would somehow pay the cost of the tariffs to the U.S. During his previous term, he imposed steel and aluminum tariffs on Canada and launched a torturous renegotiation of NAFTA, the countries’ free-trade pact, which he ultimately rebranded as USMCA – the United States-Mexico-Canada Agreement. What he is promising this time is more wide-ranging.
Mr. Trump’s campaign did not respond to questions about how his trade agenda would apply to Canada.
Neither the Canadian embassy in Washington nor the offices of Canada’s industry and trade ministers responded to requests for comment. As The Globe and Mail reported earlier this year, Trudeau government officials are preparing for Mr. Trump’s possible return by seeking to build ties with people in his orbit and with politicians in trade-dependent U.S. states.
Unilateral actions
Allies and advisers close to Mr. Trump are already laying the groundwork for him to pursue his agenda without being constrained by free traders in Congress or existing U.S. trade deals.
In a book last year, Robert Lighthizer, Mr. Trump’s trade chief in his first term, championed using section 338 of the Tariff Act of 1930. The obscure provision grants a president the ability to impose tariffs of up to 50 per cent unilaterally if the chief executive determines another country has discriminated against U.S. companies.
Inu Manak, a trade expert at the Council on Foreign Relations think tank, said Mr. Trump proved during his time in the White House that he would generally follow through on his trade threats. “Whatever he says, he is probably going to do some variation of it. I would take Trump seriously, if not literally,” she said.
Such actions would almost certainly be subject to court challenges by U.S. companies. But even if the conservative-controlled U.S. Supreme Court were ultimately to rule against some of Mr. Trump’s trade policies, protracted uncertainty during years of litigation would cast a pall over trade and international investment.
Mr. Trump would also be better placed to implement his agenda than he was during his previous term, when advisers scrambled to figure out how to do what he was proposing and a handful of pro-free-trade figures in the White House tried to restrain him.
This time, Mr. Trump’s campaign and its allied think tanks have prepared policies in advance. At least one, the Heritage Foundation, has also compiled a database of loyalists who could be swiftly installed in key government positions. “In a second administration, they would be far more effective than the first time,” Ms. Manak said.
USMCA, again
Ottawa is also girding for a potential renegotiation of USMCA. When Mr. Trump’s administration negotiated the pact to replace the similar NAFTA, Mr. Lighthizer had a provision written into the deal that obliges the countries to review the agreement in 2026 and decide whether to renegotiate or extend it. If they do not, USMCA will automatically expire in 2036.
“Canada needs to be prepared for a very difficult scenario. I can’t imagine the U.S. would say ‘We agree to continue it another 16 years without changes,’” said Lawrence Herman, a Toronto trade lawyer.
Most importantly, USMCA’s auto industry rules have not worked the way Mr. Trump intended.
The deal included new wage standards for the industry and ratcheted up the amount of North American content vehicles must contain in order to be sold between the three countries without being subject to tariffs. Mr. Trump’s hope was that such rules would push auto companies to build more plants in the U.S.
Instead, some companies are simply opting to pay tariffs to import cars from Mexico, calculating that this is less expensive than complying with USMCA. Doing so frees them to buy components and materials from China and other countries that may provide them more cheaply.
At a rally in Wisconsin earlier this month, Mr. Trump took aim at Chinese and American auto companies setting up factories in Mexico. He promised tariffs up to 200 per cent to force those plants into the U.S.
Other obvious targets for the U.S. in a reopened USMCA would include Canada’s Digital Services Tax, a recently-enacted 3 per cent levy largely aimed at capturing revenue from American tech giants such as Meta Platforms Inc. and Amazon.com Inc., and the protectionist supply management system for dairy and eggs.
Kenneth Smith Ramos, Mexico’s chief negotiator during the USMCA talks, said reopening the deal could rapidly lead to a trade quagmire. If the U.S. demanded changes to auto content rules, for instance, Mexico could then push for greater labour mobility. “That could start unravelling the delicate balances in this agreement. It’s a bad idea to tinker,” he said.
Mr. Smith Ramos argued that U.S. complaints about Chinese goods entering the American market via Mexico would be better dealt with in a side deal. Mexico could, for instance, agree to tighten its customs standards or establish a tougher framework for evaluating proposed investments in Mexico by overseas companies.
Adding more protectionism to USMCA could simply push companies to stop investing in the three-country market, he said. “All of that could increase costs to a level where industry would leave North America.”
What Harris would do
Ms. Harris has repeatedly rounded on Mr. Trump’s tariff pledge, describing it as a “tax” on U.S. consumers. Instead, she is proposing a continuation of President Joe Biden’s policy of giving government money to manufacturing companies so they can build and maintain factories in the U.S. A fact sheet from her campaign put the cost at US$100-billion.
Such a policy could end up also costing Canadian taxpayers. To match subsidies for electric vehicle plants under Mr. Biden’s Inflation Reduction Act, the federal and Ontario governments have had to dole out tens of billions of dollars’ worth of funds to build plants in Canada.
It’s an open question how long Ottawa and provincial governments could afford to compete with Washington’s far larger treasury.
Still, none of this has caused the trade psychodrama that Mr. Trump is promising to revive if he sits in the Oval Office in January.
“The word tariff, properly used, is a beautiful word,” he said in Savannah. “It’s music to my ears.”
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Publish date : 2024-10-08 22:00:00
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