by Thomas Walkom
The Trump tariff threat is a reminder of Canada’s free-trade dependency.
Free trade with the U.S. and Mexico was supposed to unambiguously benefit this country. And in some ways, it did. But by integrating our industries so seamlessly into the U.S. economy it also left us even more vulnerable to the whims of American politics.
President Donald Trumpís decision to impose ruinous tariffs on steel and aluminum imports into the U.S. is more than the antics of a madman. It is a political response to real pressure – from both domestic companies and their workers.
George W. Bush, an ardent free-trader, bowed to this pressure when he was president. Why would anyone expect a free-trade critic such as Trump to behave differently?
As usual, Ottawa’s response is to ask for special status – in this case, an exemption from the 25-per-cent tariff on imported steel and the 10-per-cent tariff on imported aluminum.
Trump has responded by saying he is open to that idea – but only if Canada is willing to give up more ground in the concurrent North American Free Trade Agreement talks.
This isn’t very nice of the U.S. president. But itís hardly insane.
There is a lot of loose talk around the Trump tariffs – including from the president himself.
They do not necessarily presage a trade war. The European Union’s response, to slap tariffs on Kentucky bourbon, Harley-Davidson motorcycles and U.S.-made jeans, smacked more of political theatre than war.
Canada’s Liberal government is still trying to figure out its response. But the integrated nature of the Canadian and American economies gives it little room to manoeuvre. It is unlikely to do anything that would invite counterretaliation from the U.S.
In any case, even a full-scale trade war would not drive the world into recession. Some look back to America’s Smoot-Hawley tariff of 1930, which started a trade war that is often blamed for the Great Depression.
But as Nobel Prize-winning economist Paul Krugman has pointed out, trade wars – including the one ignited by Smoot-Hawley – donít cause recessions. They may have negative effects (in particular they encourage inefficiency). But on their own, they donít reduce global aggregate demand for goods and services – which is the necessary condition for a recession.
Krugman, who is a fierce critic of Trump, writes in his New York Times column that the presidentís proposed steel and aluminum tariffs, while potentially an unwelcome sign of where American policy is heading, are not in themselves “that big a deal.”
Protectionism does have its virtues. It can keep alive domestic industries that would founder if exposed to global competition.
Canada likes to present itself as a paragon of free trade. But it uses hefty tariffs to protect the Quebec and Ontario dairy industries from foreign competition.
It also uses non-tariff barriers to protect medicare from being picked apart by foreign private insurers.
But most of the rest of the economy is completely integrated, via NAFTA, with that of the U.S.
As long as there is a free-trader in the White House, thatís fine. But put an America-firster in charge and the dynamic changes.
In steel, for instance, Canada has a trade deficit with the U.S. We buy more steel from the Americans than we sell to them. In theory, therefore, mutual protective tariffs on steel should work to Canada’s advantage. In theory, the loss of the U.S. market should be more than compensated for by the expanded Canadian market.
In practice, however, thatís not how things work.
In practice, the Canadian steel industry is a small and specialized part of the American steel industry – in everything but nationality.
But we have now entered an era in which nationality matters again. As this weekís election in Italy shows, right-wing populism and economic nationalism are not going away.
With its charming but outdated belief that free trade conquers all, Canada’s government is singularly unprepared for this new world.
Copyright 2018-Torstar Syndication Services