Raising the stakes in U.S. trade talks brings big risks
There have been tariffs and countertariffs, negotiations and breakdowns, “Lake America” and an invitation to kiss the Premier of Ontario’s posterior.
Since Prime Minister Mark Carney walked away from an unpalatable trade agreement with the United States, the two countries are again engaged in a tense standoff, and there is little indication about what will happen next.
In the interim, there have been calls for Canada to take a more aggressive stand, including export levies on natural resources such as oil and potash. Ontario Premier Doug Ford has said that “everything is on the table,” such as cutting off electricity and critical minerals exports, or applying surcharges.
After all, when the country has been “attacked,” as Mr. Carney has said, escalating to make your opponent feel pain and back down might feel natural. (For their part, the premiers of Alberta and Saskatchewan have said they are against taxing natural resources bound for the U.S., while Mr. Ford said he would follow a “Team Canada” approach, despite his bravado.)
Escalation can work in trade disputes, but it’s more likely to be effective when certain conditions are in place. And for Canada, this is no ordinary trade war. That makes escalation an even riskier strategy, experts say.
Dan Ciuriak, an economist and senior fellow at the Centre for International Governance Innovation, said that escalation can be appropriate when there is a limited, specific and negotiable demand that the other party can ultimately accept.
To take one example from history, when Spain and Portugal joined what was then called the European Community in the 1980s, they had to conform to higher tariffs on American grain. When no deal could be made, the U.S. threatened 200-per-cent tariffs on a range of European goods, such as gin, olives, cheeses and other continental delights. (The New York Times dubbed it the Martini War.) But shortly before those punishing tariffs went into effect, the two sides hashed out an agreement.
Canada’s plight with the U.S. is different. For one thing, it’s not clear what America’s intentions are, according to Mr. Ciuriak. “We can’t treat these grievances credibly. We have to treat the threats credibly, up to a point,” he said. “That’s where things get really dicey for us.” How do you respond to legitimate threats based on illegitimate grievances?
One way would be through defence, not offence. Indeed, Mr. Ciuriak would characterize Canada’s latest round of countertariffs as defensive. In response to Mr. Trump’s imposition of 50-per-cent tariffs on $27.6-billion of Canadian goods, Ottawa has prepared a package of dollar-for-dollar countertariffs that goes into effect Sept. 8.
Mr. Ciuriak said these levies are designed more so to protect Canadian industries rather than damage American ones. That makes sense, given the U.S. no longer seems interested in trade as we know it, in his view. “There’s nothing we can do about that. They’re taking their ball and going home,” he said. What that means is that Canada should continue to take measures to protect its economy and engage with the rest of the world, while the U.S. continues down its protectionist path.
That makes today’s situation very different from 2018, when the first Trump administration slapped tariffs on Canadian steel and aluminum. Canada responded in kind, along with targeted tariffs on products such as Kentucky bourbon as a form of political pressure. The two sides reached an agreement in May, 2019, ahead of the ratification of the United States-Mexico-Canada trade agreement.
The administration’s views on tariffs and trade have only hardened since then. “They are deeply committed with all countries to implementing this trade policy, so there is no real force that a single country can exert in order to force the U.S. to back down,” said Wolfgang Alschner, a law professor at the University of Ottawa.
China engaged in a war of escalation with the U.S. last year, and tariffs imposed by each country surged past 100 per cent. China put in place export restrictions on rare earth minerals – which the U.S. needed – and the situation eventually cooled off. For China, critical minerals were a perfect chokepoint to inflict pain on the U.S. without damaging itself. Canada doesn’t have a lever like that to pull. “The U.S. is always going to be in a position to hurt us more,” Prof. Alschner said.
What he finds frustrating is that Ottawa’s recent countertariffs are misinterpreted by the public as retaliation to put pressure on the U.S., when they have in fact been crafted to influence Canadian behaviour, pushing the country to wean itself off American products. “It’s a huge effort for the Canadian economy to create supply lines don’t go through the U.S., but it’s the only way we can reduce our exposure,” he said. “The countertariffs are enabling us to do that.”
Escalating with the U.S. by curtailing or taxing energy and potash exports would not be in line with Canada’s approach so far. Such measures would have an immediate impact on the American economy, but they could be very damaging at home and risk a bigger escalation from the U.S. side. “You would have to use this where you had confidence that they wouldn’t hit back at us in a way that we couldn’t handle,” said Gitane De Silva, founder of advisory firm GDStrategic and Alberta’s former senior representative in Washington. “That’s the challenge. The trading relationship is mutually beneficial, but it’s not proportionate.”
Julian Karaguesian, a visiting lecturer in economics at McGill University, is also skeptical about Canada upping the ante in that way. “We hurt ourselves, and we hurt very old relationships,” he said. “In the extreme, we have cards, but we don’t have to go that extreme.” There are other measures Canada could take. The U.S. administration, in his view, is beholden to special interests that Canada could pressure, such as through military procurement policies or adding punitive levies to big technology companies. “If they keep coming at us, I don’t see how Carney can do anything other than escalate,” he said.
The U.S. President also cares about being perceived as a winner. Retaliatory measures can create such an opportunity in that removing them might not cost Canada much while giving Mr. Trump the appearance of a win. “If Trump’s people feel they can spin that into a victory, we go back to the table,” Mr. Karaguesian said.
Joseph Steinberg, an economics professor at the University of Toronto, is wary of retaliation. “Retaliating is unlikely to get Trump to change his behaviour toward Canada for the better, and maybe more likely to change for the worse,” he said. “The limited evidence we have says retaliation leads to higher tariffs if you’re dealing with President Trump.”
Prof. Steinberg recognizes that his opinion is in opposition to the national mood (he has not persuaded many people, he acknowledged), but maintains that countertariffs end up inflicting pain for Canadians, which the government then has to address with more deficit spending. “It may satisfy you emotionally to stand up to the President, but ultimately, it is just making your life harder when it comes down to money in your pocket,” he said.
The Prime Minister has built up a lot of political capital, Prof. Steinberg continued, and Mr. Carney should use that goodwill to implement contentious domestic policies to help the Canadian economy, such as tax reform and eliminating interprovincial trade barriers.
Trade wars eventually end. What typically happens, said Douglas Irwin, an economic historian at Dartmouth College in New Hampshire, is that cooler heads prevail and both parties de-escalate because there are benefits to be had. “Countries want to take advantage of the economic gains that come from bilateral trade,” he said. “But there’s no guarantee with this administration.”
This article was first reported by The Globe and Mail
