Canada’s quick retaliation to U.S. President Donald Trump’s latest volley in his “America First” campaign has raised fears of a trade war between two of the world’s friendliest allies – and thrown doubt on Canada’s long-held status as a favoured partner of the economic superpower.
The consequences of U.S. steel and aluminum tariffs for Canada’s economy are expected to be modest. The greater concern is the future of Canada’s relationship with its largest trading partner, said Benjamin Tal, deputy chief economist of CIBC World Markets.
“I think the more significant issue is that Canada will have to retaliate and start a mini-trade war, which is clearly negative,” Tal said. “That will have a negative impact on the Canadian dollar and the optimism about NAFTA will be replaced with pessimism — which is much more significant than the actual tariff.”
The key now for Canadian negotiators will be to refuse the U.S. administration’s efforts to entangle the issue of steel and aluminum tariffs with the NAFTA negotiations, said Eric Miller, president of the consulting firm Rideau Potomac Strategy Group, which focuses on trade issues.
“The Trump people are deluded if they think Canada will offer additional concessions just because of this,” he said. “There is a process for retaliation which will be executed. Therefore you keep the damage from the steel and aluminum issue contained in its own area. The U.S. may be taking the view that this is related but if we respond to it separately and not give them what they want, then we are in a much stronger position than if we start panicking.”
Nevertheless the U.S. tariffs reflect a significant shift in the way Canada has traditionally been viewed by the U.S., Miller said.
“Donald Trump doesn’t view the relationship with Canada or anybody else as particularly special,” he said, adding that Japan, the U.S.’s strongest ally in Asia during the post-Second World War period has also been hit with tariffs.
“This is not as much about us as many people would like to think,” he said. “They aren’t targeting Canada specifically. We simply haven’t got the recognition of the distinct nature of our economic relations with the U.S. that we usually get.”
U.S. Commerce Secretary Wilbur Ross announced plans Thursday morning to slap tariffs of 25 per cent on steel and 10 per cent on aluminum imported from Canada, Mexico and Europe, on the grounds of national security. The move ended a temporary exemption Canada had been granted pending the outcome of negotiations to revamp the North American Free Trade Agreement.
By afternoon, Canada had hit back, announcing retaliatory tariffs of $16.6 billion. Canada will also challenge the U.S. steel and aluminum tariffs under NAFTA and the World Trade Organization.
Emphasizing Canada’s history as a “secure supplier” of steel and aluminum to the U.S. defence industry, Prime Minister Justin Trudeau described the U.S. tariffs as “an affront to the longstanding security partnership between Canada and the United States.”
“That Canada could be considered a national security threat is inconceivable,” he told reporters during a press conference in Ottawa yesterday.
The impact of U.S. steel and aluminum tariffs on Canada’s economy is expected to be modest. Ontario, home to 70 per cent of Canadian steelmaking, is the most exposed to the tariffs, with steel exports accounting for one per cent of GDP, said Benjamin Reitzes, Canadian rates and macro strategist at the Bank of Montreal. A 10 per cent decline in those exports would cut Ontario GDP by a tenth.
“It’s clearly not a positive for Canada but I wouldn’t be overly negative yet,” he said. “The bigger picture is what comes next and if this is a sign of more tariffs to come.”
Despite invoking justifications of national security, the Trump administration has explicitly tied Canada and Mexico’s exemption from steel and aluminum tariffs to the ongoing talks to overhaul NAFTA. In announcing the tariff decision, Ross said the talks are taking longer than the U.S. had hoped. The parties remain at odds over issues including U.S. demands to limit government contracts awarded to Canadian and Mexican firms and proposals to curtail the power of dispute resolution panels.
During his press conference, Trudeau said a proposed meeting with Trump to seal a NAFTA deal fell through after Vice-President Mike Pence called to say the visit was conditional on adding a sunset clause to the pact. The clause – in which NAFTA would automatically expire after five years unless the three countries agree to extend it – has been a key stumbling block in the talks. Canada and Mexico insist it would hurt investment by depriving businesses of long-term certainty.
With the deadline all but passed for securing a deal in time for approval from the current U.S. Congress, the NAFTA talks are now expected to carry on into 2019. As a result, doubts surrounding Canada’s ongoing access to its largest trading partner will persist, Miller said. That trade issue, combined with concerns about Canada’s competitiveness in light of recent U.S. reductions in business taxes, will all present a risk to the economy.
“NAFTA is one part of this, but combined with other things, it’s a pretty steep hill for Canada to climb to deliver growth over the medium term,” Miller said.
And in the meantime, the Trump administration has, in one sweeping move, gone some distance to alienate key trading partners and allies, said Matthew Kronby of BLG’s International Trade Group.
“The U.S. is demonstrating its fundamental unreliability as a trading partner and its lack of commitment to the rule of law, and that is unfortunate,” Kronby said. “We can hope that in the longer term cooler heads will prevail in the U.S. but the fact that this is happening really will lead to an increased pressure in the U.S. to complete trade agreements with other countries including China.”