President Donald Trump recently ramped up tariffs on steel and aluminum imports, of which Canada is the biggest supplier to the U.S.Cole Burston/Getty Images
Fraser Johnson is the Leenders Supply Chain Management Association Chair at the Ivey Business School at Western University in London, Ont.
In the latest twist to the Canada-U.S. trade saga, last week U.S. President Donald Trump doubled tariffs on steel and aluminum imports, which now stand at 50 per cent. As the largest supplier of both metals to the U.S., these tariffs disproportionately affect Canada. Not surprisingly, there were immediate calls for the Canadian government to retaliate, including Ontario Premier Doug Ford, who said: “We can’t sit back and let President Trump steamroll us. We need to react immediately.”
To do so would be a mistake. The federal government initially imposed a series of retaliatory tariffs in March and early April in a tit-for-tat trade exchange with Washington. It was a predictable, and maybe natural, response. Many Canadians felt that we were being bullied by our largest trading partner and Canada needed to retaliate. However, this approach has been unproductive, only serving to further alienate Mr. Trump and his trade representatives.
More recently, Prime Minister Mark Carney has taken a more pragmatic approach to trade relations with Washington, and the Canadian strategy has quietly appeared to shift. Mr. Carney has exempted products from counter-tariffs to help Canadian businesses adapt and because of concerns about driving up costs for Canadian consumers. According to a report by Oxford Economics released last month, almost 60 per cent of the $96-billion in U.S. imports hit by Canadian counter-tariffs are eligible for relief.
The rhetoric from Ottawa has also been toned down. While it is still clear that he believed the tariffs were “unjustified” and “illegal,” Mr. Carney decided not to respond immediately and refrained from publicly admonishing Washington, as was the tendency of his predecessor Justin Trudeau.
That was the right thing to do. I have been steadfast in my opinion that responding with counter-tariffs is an ineffective strategy. They serve only to raise prices for consumers and punish Canadian businesses that are already struggling with the effects of Mr. Trump’s tariff policy.
From retaliation to negotiation: How Canada’s U.S. trade strategy is shifting under Carney
Similarly, it is also my view that the U.S. tariffs are ill-conceived and unsustainable. Another reason to not retaliate against the tariffs is that Mr. Trump would not be able to keep them up for long.
Supply chains rely on regional networks for a number of practical reasons, including minimizing transportation costs and shortening lead times. North America is a perfect example, with our integrated supply chains in sectors such as energy, autos, and steel and aluminum. That Canada and Mexico are America’s largest trading partners is a function of the supply chain infrastructure that has developed and evolved over decades. American businesses need Canadian steel and aluminum. U.S. production capacity for primary aluminum can satisfy only about 20 per cent of its total demand and it has been nearly half a century since a major aluminum smelter has been built in the United States. Nearly one-quarter of U.S. steel and iron imports and approximately one-half of its aluminum imports come from Canada.
Ultimately, though, we must be realistic. Efforts to diversify our markets and eliminate barriers to interprovincial trade certainly need to be pursued. However, the practical reality is that Canada’s geographic proximity to the world’s largest market means we will continue to rely on our economic relationship with the U.S.
The indirect effect of the recurring cycle of tariffs and counter-tariffs is economic and business uncertainty, which contributes to investment hesitancy and reduced risk-taking. In the current environment, Canadian businesses are less likely to make commitments to capacity expansion, new technologies, hiring and new product/service development.
A resolution is required so that businesses can understand the rules and evaluate the economic consequences of their decisions.
Canadians are starting to see the effects of the trade dispute with Washington, with plunging exports to the U.S. and the unemployment rate ticking up. Many economists are expecting an economic slowdown and possibly a recession later this year. The Ivey Purchasing Managers Index, a leading economic indicator, contracted for the second straight month in May while the Prices Index showed accelerating costs.
This is not the time for impulsive reactions. I support a deliberate approach. Neither party wins by escalating the trade war, and I believe Mr. Trump wants a deal with Canada, but the U.S. has the advantage in this situation, and it will be more difficult if we retaliate.
The negotiations are complex and involve multiple stakeholders, and will most certainly take several weeks to hash out. While I expect that current negotiations with the U.S. will be resolved successfully, patience is required.