Canada: Prepare for a bloody trade war!

Approximately 88 years ago (in June 1930), American lawmakers did exactly what the U.S. is doing today – they enacted the now infamous Smoot-Hawley Tariff Act 1930 – and raised tariffs on hundreds of goods imported into the U.S. According to one quantitative assessment, these measures reduced U.S imports by over 40%, sending the world’s trading order into a tail spin. There are others that say Smoot-Hawley exacerbated the impacts of the Great Depression

Nerves of steel

In late May 2018, the U.S announced its decision (previously telegraphed and widely expected) to forge ahead with tariffs on steel (25 percent) and aluminum (10 percent) imported from Canada (and other countries too!).  The mere fact that these tough, yet highly anticipated, tariffs were looming, sent the Canadian economy in a tizzy:

  • The S&P/TSX Composite Index dipped by 43.87 points, losing 0.27% intra-day
  • The stock price of Canada’s lone publicly-traded steel company, Stelco Holdings Inc., saw a 3.1% decline
  • The Loonie dipped by 0.7%; and
  • The yields on 10-year government of Canada bonds lost 4-basis points, dropping to 2.23%

If just the mere announcing of tariffs can have this type of impact, imagine what kind of ripple-effect the actual imposition and counter-imposition of more duties will have globally!

The world trading order is a highly interconnected piece of multi-lateral relationships, with the U.S. importing steel from over 100 nations. The attempt to target one specific country (in this case, China) through the broad imposition of steel and aluminum tariffs, will have a domino effect. Based on 2017 steel import figures compiled by the U.S International Trade Administration, the top eight economies (in order of magnitude) most likely to be disrupted by the 2018 steel tariffs include:

  • Canada
  • Brazil
  • South Korea
  • Mexico
  • Russia
  • Turkey
  • Japan
  • Taiwan

To a lesser extent, countries like Germany, Italy, India and France will see a disruption in their balance of steel-related trade with the U.S., albeit of not to a very significant degree. While China, the unspoken intended target, trails the list of economies that will be impacted by steel tariffs, other anti-China measures by the US (such as duties on electronic items, aerospace, machinery and investment) could send shock waves throughout the world’s second-largest economy.

But such shock waves are highly unlikely to be contained to a single country. Smaller economies, like Canada’s, should brace for disproportionate fallout. According to one Washington-based researcher, the imposition of the aluminum and steel tariffs will likely contribute to a US$3.2B loss to Canada’s economy annually.

But the ripples would be felt across a much broader segment of Canadian society. For instance, Canada’s beer industry, a major consumer of aluminum and related products, may be seriously hit – and likely decimated as a result of the new tariffs.

According to the Conference Board of Canada, the beer industry contributed nearly $14B to Canada’s economy in 2016. With one out of every 120 jobs in Canada supported by the industry – either in direct or indirect ways, any shock to the industry (courtesy higher aluminum tariffs) is likely to create a major employment crisis country-wide. 

War clouds looming

In a recent commentary on the prevailing global trade order, primarily related to Canada-U.S. trade, the Bank of Canada (BoC) made some gloomy predictions.  While experts believe that the fallout from a trade war could be “manageable”, the BoC believes prevailing uncertainties could wipe out almost 1% from Canada’s export forecasts by 2020. But with trade-war clouds looming, that’s not the worst of the BoC’s fears!

If the current state of tensions continues, or if the economic skirmishes lead to a full-out trade war, it could wipe out more than 2% of business investment anticipated in the next year or so, from the Canadian economy. As a result. BoC experts expect that Canada’s GDP will suffer a nearly 0.35% hit by the end of 2020. To put that into perspective, Canada’s economy will take a nearly $7.5 billion hit to the country’s earnings.

And all this is just from “uncertainty” over whether a trade war could actually break out. Imagine the carnage that will follow come July 1st, once the Canadian counter-tariffs kick in on imported U.S. steel and aluminum. Given what we know of the Whitehouse’s belligerent stance on world trade, other sectors of the Canadian economy will definitely come into the trade war crosshairs: Autos, Agriculture, Education, Services…and more!

But there are even darker war clouds gathering beyond the shores of Canada and the U.S. The European Union and China have also fired off a barrage of tit-for-tat duties, surcharges and tariffs on U.S imports. So, what does this mean for Canada’s economy? Well – there’s good news, but mostly bad!

If, as China threatened, there is a surcharge on U.S pork imported into the country, it could give a boost to Canadian pork exports. But other European nations could compete for that business too – offering just a sliver of economic opportunity for Canada.

However, the U.S. tariffs on goods made in China would certainly slow down the Chinese economy. That would mean China will slow down it’s demand for commodities – a major export driver for the Canadian economy. At a macroeconomic level therefore, the impending trade war will have more of a deleterious impact on Canada than a positive one!

And when you add to this situation, the fact that the U.S. will certainly play hardball on NAFTA if Canada hits back on the steel and aluminium tariffs, there is every indication that the collateral damage from a trade war will be bloody for Canada.

Parting thoughts

Though it may be tempting to look at these developments through rose coloured glasses (“This too shall pass!”), only the uninformed would take such an optimistic view. These rather serious developments should be looked at in a much broader context, including the aero-space spat (Bombardier Vs Boeing), Softwood lumber disputes and NAFTA.

Considering that the U.S. is Canada’s largest trading partner, and factoring into the equation all of these headwinds, it’s easy to see where Canada’s economy is headed: Straight into a full-blown trade war that could set our economy back years!