The Trouble With Trade Wars
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The Idea Is To Give Those Yankees A Taste Of Their Own Medicine
by Todd Hirsch
Other than bad calls in hockey or the suggestion of a $5 coin, Canadians very rarely get too angry about much. But the latest nose-thumbing from the US over trade in softwood lumber is generating some anger in this country that could finally prompt us to act very unCanadian-like.
For the past several years, the US has repeatedly challenged Canada’s softwood lumber industry and has slapped on a series of extremely damaging tariffs and duties. And, repeatedly, the NAFTA and WTO dispute panels have ruled in Canada’s favour. Regardless, the US is refusing to play by the rules – rules that they themselves agreed to when the FTA and NAFTA were negotiated.
News reports this week suggest that Federal Trade Minister Jim Peterson and the Liberal caucus are looking for ways to fight back. They are examining sectors where Canada could impose its own tariffs and place maximum pressure on the US. The idea is to give those Yankees a taste of their own medicine and hit them where it hurts.
Great idea. The question is… what sector to target?
By value, the largest imports from the US are car and transportation equipment, and parts thereof. These totaled nearly $50 billion last year, about a quarter of our total imports from America.
Try slapping on a 30% tariff on auto parts! You can almost here the hysterical laughter from Windsor to Quebec City – the political power corridor that the Liberal government so desperately needs going into a soon-to-be-called election. A stiff tariff on transportation equipment would seriously cripple the already enfeebled manufacturing sector, a major employer of thousands of Canadians. Damaging our country’s largest industry just to pressure US trade negotiators makes no sense.
How about a hefty import tariff on machinery, mechanical appliances, and electronic equipment? Combined, these items account for another $50 billion in imports from the US. Let’s hit ‘em hard with tariffs and quotas here!
But doing this would be terribly counter-productive. It is access to that modern, efficient and labour-saving machinery and equipment that Canada so badly needs. For the last few years, Canadian economists have been practically sleepless worrying about our falling labour productivity. Our Minister of Finance, Ralph Goodale, has claimed that his next budget will contain incentives for improving that productivity. But tariffs on American machinery and equipment would have the totally opposite effect of what is needed right now.
Let’s find a category of imports that, if limited or made more costly by tariffs, won’t be a body blow to Canada’s economy.
You have to go quite far down the list of imports before you reach a sub-group that is (economically) unessential: “Pearls, Precious Stones and Jewelry.†This seems like a good target. Who needs pearls, anyway?
But imports of pearls and jewelry from the US accounted for less than 1% of our total imports from that country. It’s hardly going to bring the US to its knees.
Similarly, imports of US citrus fruits are also relatively low in value. They accounted for less than $200 million last year, or 0.1% of our total imports from the US. Imports of California wine, another often-mentioned target, amounted to a mere $131 million.
For all of these imports – jewelry, oranges, wine – Canada is a relatively small market for the US. Targeting these would be akin to slaying a dragon with a fly swatter. Besides, it is doubtful that their lobby groups are powerful enough to counter-balance the US forest products lobby.
This is the problem with targeting a particular US sector for retaliatory trade sanctions. Just about any sector is politically and economically unpalatable (the auto industry), is essential to boost our own labour productivity (machinery, equipment, and industrial materials), or is unessential but relatively small in value.
This leaves the federal government with only a few options in ending the softwood lumber dispute.
Ottawa could continue negotiating as usual. This is unlikely to be fruitful, however. There is absolutely no sign that the US is willing to budge on its unreasonable position, trade deals or not. How many times do you need to be slapped in the face before you say “enough�
Ottawa could try the opposite trade tactic. Instead of limiting our imports, how about limiting Canadian exports? Let’s see… what is something Canada has lots of and America needs desperately? Oil and gas have been suggested numerous times. Combined, these two commodities account for about $54 billion (16%) of our exports to the US. This would certainly get America’s attention. But even the suggestion of an export tax on oil and gas would rankle westerners. Do you think the American’s softwood lumber duties make westerners mad? Try a National Energy Program II. That is one fight Ottawa does not want to start.
A third option – not talked about much but worth considering – is hitting back with the very commodity in question: softwood lumber. About a third of the lumber consumed in the US comes from Canada. Why not set an export tax on top of the US tariff? This would drive lumber prices up even higher and deliver a punishing blow to the pocket books of American consumers and homebuilders. The taxes collected could be redistributed back to the Canadian producers. In the mean time, the federal government could work aggressively to expand lumber exports to other markets like China, perhaps offering export credits or subsidies to spur on trade diversification.
The Canadian forest producers are certain to be cool to this idea. But to save their own industry and end this dispute, desperate actions are required. The redistribution of the export tax and trade-promoting subsidies would help ease the adjustment.
And Canada might just find out that, when it comes to global trade, there are indeed other fish in the sea.
Todd Hirsch is from the Canada West Foundation.
@ August 25, 2005