The state of American-Canadian relations is at a critical point. U.S. President Donald Trump campaigned on an “America first” platform, with calls to dramatically alter the North American free-trade Agreement with Canada and Mexico. This has sent alarms off in Canada, with Prime Minister Justin Trudeau quick to quell uncertainty surrounding President Trump’s rhetoric ahead of the P.M.’s first trip to the White House on Feb. 13. While former House Speaker and Trump surrogate Newt Gingrich has also assured that Canada will be virtually unscathed, those north of the border are still fully aware that they are a mouse in bed with an elephant.
The Myth of U.S. Reliance on Trade with Canada
Rahim Madhavji, President of Toronto-based Knightsbridge Foreign Exchange, is not buying the positive talking points being pushed in Canadian parliament and sees a serious threat to economic output north of the border.
“Trump is a wildcard and everyone needs to pay attention,” Madhavji says. “I think we’re going to see a lot of volatility for the loonie as trade rhetoric plays out in the open. Any trade war will be negative for the Canadian dollar. Period. Canada needs to ensure it makes a good deal on NAFTA with the USA otherwise economic prospects and the Canadian dollar will be hurt.”
The Canadian government constantly reminds citizens that Canada is the U.S.’s largest trading partner with 35 states reliant on exporting across the border and that opting out of NAFTA would be far more detrimental to Americans. This is a fallacy. Not only is the U.S. the largest economy in the world with the highest GDP which makes the states perfectly able to trade between each other, in fact, only Michigan and Vermont has an annual economic output that depends on trade with Canada that exceeds 10 per cent.
“Canada-U.S. trade matters much more for Canada than the United States,” University of Calgary economics professor Trevor Tombe told The Globe & Mail.
On the other hand, a volatile loonie is a thorn in the side of Canadian manufacturing because the country’s largest provinces rely on steady cross-border trade with 49 per cent of Ontario’s GDP, as well as 23 percent for Quebec, and 31 percent for Alberta. Tombe sees the potential for further disputes as the Trump administration seeks to tighten borders and ramps up his protectionist rhetoric.
Few Canadians remember an uneasy trade relationship with the U.S., but as President Trump continues to press both P.M. Trudeau and Mexican President Enrique Pena Nieto for a renegotiation of NAFTA, it has the potential to set off a nasty trade war.
Tweaking of the deal can only occur in August at the earliest, that’s if Trump immediately sent a 90-day notice to Congress. However, he hasn’t as of yet because U.S. lawmakers have been slow to approve the contents of the letter. Trump will need to act quickly with his proposed changes to NAFTA before the Mexican election, in which President Nieto is likely to be voted out due to increasing public unrest over gas prices. The next president may not be as willing to cooperate with Trump who seeks to build a wall that physically and psychologically separates the two nations.
In Trump’s first escalation with Canada, he slapped a 24 per cent tariff on Canadian lumber, which he says was necessary because American workers have suffered from unfair subsidies north of the border where there is cheap access to public land.
A trade war, in which one country deliberately hurts another country’s exports in order to embolden their own for autarky goals, results in the other country responding by doing the same. A trade war should be avoided, especially if one country has all the cards, like in U.S.-Canada relations.
Despite Canada surely coming out as the loser in this event, a Nanos Research survey from early this year found that “58 per cent of Canadians surveyed would ‘support’ or ‘somewhat support’ Canada having a trade war with the U.S.” While only 35 per cent opposed escalations.
Even with a tariff on Canadian lumber, White House press secretary Sean Spicer responded with a dismissive “no” when a reporter asked about the prospect of a trade war. Indicating that existing trade remedy procedures have been effective.
"That's why we have dispute-settlement mechanisms to do this in a responsible way," Spicer said. "Let's let it play out. But I think secretary [Wilbur] Ross took appropriate action to protect the U.S. industry and we're going to let the process play out."
Canada, however, is not ready to stand by idly with Trump’s action remaining unchecked. The Canadian government proposed last week that retaliation can come in two forms: a ban on coal exports to the U.S. from B.C. and a study on potential duties on products from Oregon.
The reason for targeting the state of Oregon is Democratic Sen. Ron Wyden. The senator has been an outspoken opponent of softwood lumber settlement in his state, so sources telling the Canadian Press have brought up the potential for an investigation into hefty duties on flooring, plywood, wood chips, packing and wine from Oregon.
U.S.-Canada Relations going Forward
Canada’s biggest allies are senators and governors of northern border states as other factors beyond trade such as tourism and cross-border shoppers are an intrinsic part of the economies in Michigan, Washington and New York State.
It may be difficult for Canada to implement punitive tariffs without first complaining to the World Trade Organization about President Trump’s emotionally fueled actions and how the president has little comprehension of the U.S.-Canada trade relationship.
It’s important to note that cross-border trade between the two nations have not always been smooth. In 2005, Canada’s former agricultural minister Ralph Goodale was embroiled in a dispute over the Byrd Amendment, a U.S. law implemented to funnel crash from tariffs on foreign goods to American companies. This pushed Goodale and the Liberal government to compile a list of states that would be targeted with punitive measures, that would in turn, have little blow-back effect on Canada.
However, trade hostilities did not last long which started as restrictions on U.S. motorboat imports and was eventually reduced to heavy tariffs on innocuous imports like tropical fish.
Whatever measures are implemented, PM Trudeau will have to weather a fluctuating dollar due to President Trump venting his trade qualms to the press. That’s why it will require a hand and tough negotiating if the three member nations of NAFTA do indeed meet to tweak the longstanding agreement in order to salvage the closest international relationship.