In The Media

Canada could be collateral damage in a U.S.-China trade war

by Barrie McKenna (feat. Colin Robertson)

The Globe and Mail
March 22, 2018

Maybe there is a silver lining for Canada in the escalating U.S.-China trade imbroglio.

The steep tariffs on Chinese products, announced on Thursday by U.S. President Donald Trump, could give some Canadian companies a competitive edge in the U.S. market, particularly in targeted industries such as clothing, aerospace and rail cars. And if China hits back with protectionist measures of its own – on soybeans, perhaps – Canadian farmers could similarly make inroads in the tough Chinese market.

Some Chinese manufacturers might even invest more money in Canada, seeing it as a way to skirt the US$60-billion in tariffs to be imposed on their products.

On a more macro level, higher U.S. tariffs could spark inflation, which would lead to higher interest rates and a stronger U.S. dollar. That, in turn, would make all Canadian exports more competitive in the United States – from cars to lumber.

But the glass-half-full narrative only goes so far. It's unequivocally bad for Canada if our top two trading partners and the world's largest economies come to blows. Canada could be the innocent bystander who gets hit with an errant punch.

"Having a tariff war would be very negative," says Craig Alexander, chief economist at the Conference Board of Canada. "At the end of the day, Canada has a lot of exposure to the global economy. It could hurt the U.S. economy, it could hurt the Chinese economy, and it could hurt Canada through a number of channels."

If the U.S. tariffs destabilize the Chinese economy, Canada could feel pain from less demand and lower prices for its commodity exports to China, including wood pulp, oil seeds and coal.

A more direct blow would come from Canada's integration into North American supply chains in industries such as autos and steel. Higher tariffs will raise costs for all companies in the region, making them less competitive against rivals located elsewhere.

"Canada may not be a direct target but we risk becoming collateral damage, because of our niche in supply chains, many of which involve Chinese production," argues Colin Robertson, a former Canadian diplomat and fellow at the Canadian Global Affairs Institute.

Sure, a few Canadian companies might benefit from a U.S.-China tariff war. But the net impact would almost certainly be negative.

In spite of what Mr. Trump and his advisers may think, "trade wars are hard and everybody loses," Mr. Alexander says.

Within 15 days, the U.S. government intends to publish a list of 1,300 Chinese goods that will be hit with tariffs – everything from shoes and clothing to aerospace and rail cars.

Predicting with any precision how Canada will fare in all this isn't easy.

"There is bound to be a lot of trade diversion and reshuffling of sourcing," pointed out Dan Ciuriak, former deputy chief economist for Canada's Global Affairs department. "It's hard to call net effects given the complexity of the trade relationships."

Canada is already getting burned by Mr. Trump's misguided efforts to reverse the massive U.S. trade deficit.

Consider the Trump administration's targeting of Mexico via the North American free-trade agreement. Canada's trade has been in near-perfect balance with the United States for at least three years. That has not stopped the United States from threatening to pull out of NAFTA unless Canada bends to a series of painful concessions.

Mr. Trump's showdown with China has echoes of Ronald Reagan's war against Japanese imports in the 1980s.

Someone might want to remind Mr. Trump and his nest of hawkish trade advisers how that episode worked out. Mr. Reagan's get-tough strategy, which included negotiated limits on Japanese auto and steel imports, cost American jobs and imposed higher prices on consumers and manufacturers. And the trade deficit with Japan is roughly where it was in the late 1980s because the United States failed to address the root cause of its trade deficit.

The parallels between Mr. Trump and Mr. Reagan are apt. Both fought for big tax cuts that swelled the U.S. budget deficit. And countries inevitably run trade deficits when they save less than they invest – as the United States has done for decades. That's because budget shortfall must be financed by foreign lenders, whose influx of cash pushes up the U.S. dollar and punishes exporters.

Perhaps it's no coincidence that Mr. Trump and his key trade advisers – Commerce Secretary Wilbur Ross, Trade Representative Robert Lighthizer and director of trade and industrial policy Peter Navarro – all launched their careers in the middle of the U.S.-Japan trade wars.

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