President-elect Donald Trump talks to reporters after a meeting with Republican leadership at the Capitol in Washington, on Jan. 8.Steve Helber/The Associated Press
Dan Ciuriak is an economist, senior fellow at the Centre for International Governance Innovation and an expert on global trade.
Donald Trump has stated his intent to impose 25-per-cent tariffs on all imports from Canada on his first day in office. Let’s consider what we did the last time Mr. Trump imposed tariffs on Canadian exports.
In 2018, Mr. Trump imposed tariffs on Canadian exports of steel and aluminum under the national security provision (Section 232) of the U.S. Trade Expansion Act. Canada retaliated tit-for-tat, and the American tariffs were withdrawn under a deal that put a ceiling on increases in Canadian exports.
Canadian officials have indicated they will follow the same route this time, presumably by singling out pain points in the U.S. economy and society to generate internal pressure to force Mr. Trump to withdraw the U.S. tariffs, presumably with a face-saving bargain, just like last time.
But that is not the correct response – because this time is different. Implementing tariffs and border costs in today’s globally integrated production system is to effectively score own-goals, as illustrated by three major episodes in recent history where countries have done so in the pursuit of economic sovereignty: Brexit, the U.S.’s Section 232 tariffs on steel and aluminum and the U.S.’s Section 301 tariffs on China.
Britain’s departure from the European Union increased its trade costs. The results were border chaos, delays and shortages; labour market mismatches; increased bureaucracy and, most importantly, reduced participation of small firms in trade.
As Canada well understands, static productivity growth, lagging innovation, stagnating per-capita income growth and the failure of firms to scale constitute a pernicious nexus of economic ills. In fact, they are simply different facets of one and the same problem – namely, the inability to scale firms. Engagement in trade enables companies to grow, drives innovation and fuels productivity gains; the converse is also true. Britain harmed its own economy by raising barriers to trade with its major trading partner.
The U.S.’s Section 232 tariffs, meanwhile, were ostensibly intended to bolster critical heavy industries in America. As the recently nixed takeover bid by Tokyo-based Nippon Steel of the struggling U.S. Steel starkly revealed, that did not work. Meanwhile, downstream industries in the U.S., including the auto sector, were materially harmed with higher input costs.
U.S. Section 301 tariffs, which were motivated by America’s enormous bilateral trade deficit with China, did eventually crimp trade with the latter, as firms reshuffled trade through third countries. But the tariffs did not reduce America’s total foreign trade deficit – it actually widened substantially. Worse, the complications for U.S. firms generated by these tariffs led to tens of thousands of applications for exemptions.
If Canada retaliated against a 25-per-cent blanket tariff on imports, it would generate these same problems for Canada on top of the damage that the U.S. tariffs would wreak in the first place. Indeed, our self-own would be more costly to us than the U.S.’s economic assault. Such a move would only make sense if we had confidence that it would restore sanity to American trade policy.
But there are no grounds for such confidence. A fundamental shift in U.S. trade policy is under way. Emerging U.S. policy is challenging the very foundations of the economics of international trade; it argues that globalization has been bad for America, treats foreign-country trade surpluses in bilateral trade – notably Canada’s – as a “rip-off,” and singles out the integration of China into global trade as a particularly egregious mistake.
So how should we respond, if not with tit-for-tat retaliation? First, we must prepare to ride out the Trump Disturbance as we rode out the COVID-19 pandemic: by strengthening our social safety net and rebuilding our infrastructure. We should treat it like the virus it is – and trust it will burn itself out. Tariffs affect material goods, so we can also focus on innovating and exporting intangibles, such as cybersecurity tools and AI applications – areas where Canada has the knowledge capital to support the scaling up of firms.
This has the added advantage of forcing us to finally devote our industrial-policy resources toward leveraging our comparative advantage in technology. Stop the subsidization of foreign multinationals, which allows them to leverage their intangible assets, and redirect those subsidies to scale Canadian startups into Canadian giants. By doubling down on research and development, we can drive a new generation of Canadian firms.
We can learn from the examples of successful companies. In fact, the Cleveland-based Lincoln Electric – a long-time Fortune 1,000 company – has survived and thrived in America’s Rust Belt, earning a reputation for retaining employees during downturns and reinvesting in research and development.
In short, Canada should take a page from the best America has to offer, to fight off the worst.