Prime Minister Mark Carney speaks about the trade dispute with the United States at the Davie Shipyard in Levis, Que., on Monday.AFP Contributor#AFP/AFP/Getty Images
Munir Sheikh is the former chief statistician of Canada and author of Lost Minds.
The collapse of trade talks between Canada and the United States has produced Canada’s first retaliatory salvo: tariffs on 900 imported commodities from the United States worth $27.6-billion. The pitch for a dollar-for-dollar response from many quarters was understandable, but it is not a strategy for winning a war.
It seems we are not done yet with retaliation, as President Donald Trump has already threatened further actions. Canada needs to be ready for winning the war with substantially fewer troops than the U.S. in the battles that will likely come next.
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Canada needs to decide clearly what it is trying to accomplish. There are two possible objectives. The first is direct economic retaliation as we seem to have done: impose costs on the United States in the hope that American policymakers will reconsider their actions. The second is a political objective: impose carefully selected costs on a much smaller number of commodities, focused clearly on politically influential American constituencies, so that the expected political benefits, which should lead to better U.S. trade policy and positive indirect economic benefits, outweigh the direct economic costs to Canada.
These two strategies are quite distinct. They can also be combined, but in doing so, one of them will have a primary focus while the other plays a supporting role.
If the objective is the first, direct U.S. economic punishment – in military parlance a head-on collision of two armies – Canada faces an obvious disadvantage: a tariff war that is costly for the United States but potentially disastrous for Canada.
Nor does matching American tariffs produce equivalent pressure. The American tariff may be imposed on a product that it can replace relatively easily, while Canada’s response may raise the price of an essential input for Canadian manufacturers, farmers, or consumers. A symmetrical response can therefore be economically asymmetrical.
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The more defensible primary objective is political, with hopes of indirect economic benefits. Canada should seek to influence those American politicians and industries that can change the administration’s policy toward Canada. That means targeting political pressure where it matters most, with an eye on minimizing the damage to Canadians.
The removal of American alcohol from Canadian shelves offers an example of a measure focused more on politics than on imposing a substantial economic cost. The example also highlights the importance of using non-tariff tools, which can be highly effective.
Not every state or congressional district is equally relevant. A tariff imposed on a product from a state that is politically irrelevant to the current U.S. administration will generate little leverage. On the other hand, a tariff affecting a business concentrated in a potential swing state, or an industry with strong influence on the administration, may have a much greater effect.
The obvious states to examine include Michigan, Pennsylvania, Wisconsin, Georgia, North Carolina, Arizona, and Nevada. But the analysis should not stop with presidential swing states. States such as Ohio, Indiana, Iowa, Texas, and Kentucky may be politically important because of their deep trade ties with Canada.
That requires a detailed state-by-state analysis of Canadian imports from the United States. We should identify products that meet several criteria: they should be produced in states that can influence the administration and those states’ exports should be highly Canada-dependent. Additionally, we should target states where voters will feel the impact, and Canada should be able to obtain substitutes from other countries or internally at reasonable cost.
This might point toward selected agricultural and food products, machinery, consumer goods, or other politically salient commodities.
The tariff rate also should not automatically mirror the American rate. The appropriate rate would be the one that creates the greatest political pressure for the least Canadian damage. It may be lower than the American tariff if the product is highly sensitive to price. It may be higher if the product is politically concentrated and easily replaced. The rate should be calibrated, temporary, and reversible.
In such times, emotionally compelling decisions can be mistaken for rational ones, particularly when people feel threatened or humiliated. In a crisis, an action that demonstrates resolve may be politically attractive even when it does not advance the underlying objective.
Canada cannot win a trade war by matching the United States blow for blow. It may, however, improve its position by ensuring that every future measure serves a clear political purpose. Towards that end, we need to do some important homework. The earlier we begin, the better.