The United States and Japan agreed that the U.S. would impose an across-the-board 15-per-cent tariff on Japanese imports on Wednesday.Issei Kato/Reuters
Not all that bad, under the circumstances.
On Wednesday, after the United States and Japan agreed that the U.S. would impose an across-the-board 15-per-cent tariff on Japanese imports, and with European Union negotiators reportedly offering Washington a similar arrangement, what did stock markets around the world do? They threw a party.
America’s trade walls are being raised to levels not seen since the Great Depression, and in response, equity indexes from Tokyo to Paris and Frankfurt to New York celebrated.
Why? Because it could have been worse. Because U.S. President Donald Trump has conditioned us to expect worse. Because having been conditioned to expect worse, the news was not all that bad, under the circumstances.
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A year ago, the suggestion of a blanket 15-per-cent U.S. tariff would have been greeted as an economic calamity. But ever since Mr. Trump’s re-election, he’s been turning up the temperature to a level that, if I may use Trump-speak, is like nothing we’ve seen in a very long time, maybe ever.
If someone walked up to you on the street and punched you in the face, you’d scream. But if that someone had been menacing you with a loaded gun, and you got away having suffered nothing more than, say, a concussion and a bit of recreational pickpocketing, you’d breathe a sigh of relief.
That’s Mr. Trump’s art of the deal. It’s how he’s advancing his tariff ball down the field, and at a remarkably rapid pace.
According to the Budget Lab at Yale, the effective U.S. tariff rate on imports from the rest of the world is now more than 19 per cent – the highest level since 1933. At the start of the year, it was just 2.4 per cent.
Which country is most challenged by this? Canada.
The EU may be willing to live with a universal 15-per-cent tariff; it would be a negative for Europe, but the harm will be minor and limited to a few sectors. Only a relatively small part of the European and American economies are tied to trade with the other.
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Though Mr. Trump may no longer be willing to accept a 15-per-cent level. Feeling his oats after sticking it to Japan, he may want more. On Wednesday, Treasury Secretary Scott Bessent said that the Japanese only got so low a tariff rate because they agreed to the “innovative” idea of Tokyo financing a $550-billion slush fund, which will front money for projects in the U.S. of Mr. Trump’s choosing.
Where will the money come from? Where will it go? How will this work? And will any of this even come to pass? Details are unknown. The arrangement is unprecedented, unfathomable and malodorous.
But it shows how abruptly Mr. Trump has done away with the old norms. Through decades of trade negotiations, compasses pointed toward the true north of clearer rules, more stable arrangements and ever-freer trade. This is not that. This is the opposite of that.
It puts Canada in a difficult position. Japan and Europe trade with the U.S., but our economic relationship involves a high degree of integration with the Americans. The Japanese and European auto industries export to the U.S.; we have an auto industry embedded inside American supply chains.
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Prime Minister Mark Carney has been talking down expectations, and after meeting with the PM this week, the premiers did likewise. That is smart politics, but also a recognition of the reality that Mr. Trump’s goal is higher tariffs. He promised and now he’s delivering.
Mr. Carney has also pointed out that, because of the United States-Mexico-Canada Agreement, our country benefits, even now, from somewhat lower tariffs than other U.S. trading partners. Many goods traded under the USCMA get an exemption – for the moment – from at least some of Mr. Trump’s tariffs. Ottawa is surely trying to negotiate the maintenance and expansion of that preferred position.
However, even if Ottawa can persuade Washington to agree to a tariff wall whose height and breadth are limited − you know, not all that bad, under the circumstances − that will likely mean somewhat higher and wider tariffs than were in place at the start of the year, and for decades before.
That’s a problem, because many of our industries are structured on the assumption of a seamless border. They will have to be restructured in light of new realities.
This is what Mr. Carney was talking about during the election campaign, when he said that the old relationship with the U.S. − based on ever-lower barriers, steadily growing trade and increasing integration − is over.
That’s not the PM’s idea. It’s Mr. Trump’s.