Governor of the Bank of Canada Stephen Poloz leaves the G7 for Financial ministers meeting in the southern Italian city of Bari, Italy on May 12.ALESSANDRO BIANCHI/Reuters
The thing about trade wars is that they rarely happen.
There is a good reason for that. A war typically requires an action, and a reaction. And in the world of trade, retaliation is the nuclear option.
As Bank of Canada Governor Stephen Poloz put it in a recent speech: "With protectionism, everybody loses eventually, including the country that puts the policies in place."
There is a lot of talk about trade wars, particularly now, as an erratic U.S. President and his administration move to tilt the rules of trade in their favour, including a possible pullout from the North American free-trade agreement.
There are noises in Canada of fighting back. Ottawa and at least two provinces are drafting plans to fight back.
Prime Minister Justin Trudeau has told B.C. Premier Christy Clark he is seriously considering a ban on exports of U.S. coal though ports on Canada's West Coast.
Ms. Clark has also talked about taxing thermal-coal shipments.
Canadian officials say they are also looking at a possible trade case targeting allegedly subsidized wine, flooring and plywood from Oregon – apparent retaliation for Senator Ron Wyden's staunch support for U.S. duties on Canadian lumber. And in Ontario, Kathleen Wynne's government says it is prepared to impose tit-for-tat Buy Canadian rules against any U.S. jurisdiction that imposes new Buy American rules.The unfortunate reality for Canada is we are much more dependent on the United States than vice versa. Trade with the United States accounts for nearly 40 per of our gross domestic product. And the country sucks up three quarters of our exports.
But we are not that big a deal to them. Trade with Canada accounts for just 3 per cent of U.S. GDP. And less than 20 per cent of U.S. exports are destined for Canada.
This imbalance of trade clout makes us much more vulnerable to U.S. threats. It also means that if we retaliate, we are more likely to hurt ourselves than inflict significant pain on the United States. The risk is that we shoot ourselves in the foot just to defend our national pride. And the Americans know it.
A real trade war with Canada's largest trading partner would be catastrophic. Imagine the carnage of a nuclear war between the United States and North Korea, and you have some idea of the relative distribution of the carnage in a Canada-U.S. trade war.
It is not just a theoretical dilemma for Canada. Consider the threat of a ban or a tax on exports of thermal coal (which is used for energy production) passing through B.C. ports. Most of that coal is mined in the United States and shipped through Westshore Terminals, south of Vancouver. But thermal coal is also mined in Alberta and shipped through the Port of Prince Rupert.
B.C. would lose terminal activity and jobs; Alberta would lose coal production. The United States would have to find another, perhaps more expensive, outlet for its coal, or leave it in the ground.
The same logic applies to threats against imports from Oregon, a major lumber-producing state. It might feel satisfying to ban their wine or flooring, but it would inevitably trigger U.S. retaliation against other B.C. products.
Countering Buy American with Buy Canadian also seems like a rational response to U.S. protectionism. But it is not without cost to this country. The Canadian economy is small, and the array of domestic suppliers may be limited for any particular product. Canadian governments cannot always easily replace U.S. suppliers with Canadian ones. The result would be less choice and higher costs.
That is what Mr. Poloz means when he says everybody loses in a protectionist world.
Canada's economy depends on being able to freely export its abundant natural resources, including energy, minerals, crops and lumber. The wealth generated from those sales gives Canadians the means to import all the things we don't produce domestically. Any costs imposed on that trade is like a tax on the entire Canadian economy.
Canadian politicians are eager to talk about retaliation. It tells Canadians the government has their back. And it serves notice to the Americans that Canada will go down fighting.
Threatening retaliation is easy. Unleashing it is a zero-sum game.
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