Prime Minister Mark Carney, left, meets with U.S. President Donald Trump, right, in the Oval Office at the White House on May 6. The U.S. has imposed a 35-per-cent tariff on Canadian goods that are not USMCA-compliant.Leah Millis/Reuters
Where do things stand for Canada after the United States imposed a new, higher tariff last Thursday evening?
In the short run, not much has changed. In the long run, a lot may yet change.
Since the signing of the landmark Canada-United States Free Trade Agreement in 1988, the relationship has been about ever-lower trade barriers and ever-easier movement of goods and services across the border. It was part of a global trend.
Under President Donald Trump, the U.S. is reversing course, hard and fast.
The average American tariff on imports from all countries was 17.3 per cent on Aug. 1, according to the Budget Lab at Yale. That’s more than seven times higher – yes, you read that right – than at the start of the year. The last time U.S. taxes on imports were this high was 1934.
Those who say that Mr. Trump is delivering TACOs – “Trump Always Chickens Out” – are missing the real story. It’s true that the President has consistently done less than threatened. But extreme threats have conditioned both U.S. public opinion and foreign governments to accept the previously unimaginable. The result is that the U.S. suddenly has high tariff walls.
Last month, the European Union, Japan and South Korea all agreed to the U.S. slapping a 15-per-cent tariff on most of their exports. They also promised not to retaliate.
Olivier Blanchard, former chief economist of the International Monetary Fund, published a poem on the social media that describes Mr. Trump’s negotiating technique, and the EU’s response:
“I am going to cut your arm.
Please do not, please, please
Ok, I shall be generous, and just cut your thumb.
Thank you, thank you. You are so generous.”
Only two countries have retaliated: China and Canada.
Mr. Trump has already delivered the biggest change to the global economic order since the fall of the Berlin Wall, and there is more to come. That’s the context in which Canada is trying to negotiate with Washington.
Prime Minister Mark Carney appears to be attempting to preserve as much as possible of the free-trade relationship with the U.S., while laying the groundwork for a future in which Canada has no choice but to trade less with the U.S.
The Trump administration’s goal is to force the rest of the world to sell less to the U.S., which it believes will lead to far more domestic U.S. production. In accepting a 15-per-cent U.S. tariff, Japan, South Korea and the EU all effectively agreed to this. Britain did likewise, accepting a 10-per-cent tariff.
What ultimate level of import duties Mr. Trump hopes to impose on Canada, covering what basket of goods, remains unclear.
However, Mr. Carney has signalled that any deal with the U.S. could include a baseline tariff, as Japan, South Korea and the EU agreed to. He also implied that Canada might have to offer commitments to buy U.S. goods or make investments in the U.S., as those other trading partners did, though the terms of their promises are vague and possibly meaningless.
LeBlanc says Trump, Carney to speak in coming days following tariff announcement
Canada’s ace in the hole has been the United States-Mexico-Canada agreement. The 35-per-cent tariff that Mr. Trump slapped on Canada on Thursday night – up from the 25-per-cent rate imposed earlier this year – only applies to goods that are not USMCA-compliant. The Bank of Canada last week estimated that 100 per cent of Canadian energy exports, and 95 per cent of everything else, is covered by the USMCA. The whopping 35-per-cent tariff only applies to less than 5 per cent of our exports.
However, several Canadian industries are subject to sectoral tariffs, including a 50-per-cent levy on steel and aluminum, a 25-per-cent tariff on cars, and new duties on lumber. These hit hard because Canada is a major exporter of these goods, and our auto industry is fully integrated with U.S. supply chains. To the extent that Canadian-made vehicles use American parts, they receive a reduction in the auto duty, but steel, aluminum and lumber get no such break.
Other U.S. trading partners, with the exception of Mexico, have no USMCA protections.
Last Friday, Canada-U.S. Trade Minister Dominic LeBlanc said talks will continue with the Americans, but that he was leaving Washington after a long period of intense negotiations, and that no progress was likely in the coming days.
Canada has breathing room because of the USMCA, and so does Mexico. It got a 90-day extension on negotiations, with no new tariffs, on the same day as Canada was hit with the 35-per-cent levy.
The USMCA has allowed Ottawa to rag the puck, and to avoid caving in to Washington’s demands as quickly as other trading partners. Time may work in Canada’s favour. The 35-per-cent tariff, whose legal excuse is that Canada is flooding the U.S. with fentanyl, is likely to be struck down by the U.S. courts, though that won’t happen quickly. Negative economic news – a small helping of which arrived last week – could lead the American public and business to push back more forcefully against Mr. Trump’s tariff plans.
The USMCA has been a shield for Canada, but it is up for renegotiation next year. Mr. Trump could also walk away with six months notice.
The Canadian economy is holding up, but there are many unknowns: Does Trumpenomics’ vision for the future include a North American trading bloc, with Canada benefiting from lower tariffs than the rest of the world? Or does Mr. Trump want to subject Canada to the same tariffs as the rest of the world, which would sever continental automobile supply chains, while reducing most other exports?
We are about to find out.