U.S.-Canada Trade War – Slim chance of Canada’s survival

It is said that in a battle of unequal’s, it is always the weakest contestant that loses. It’s also said that when two elephants do battle on the grassy plains, it’s the ants in the grass that get trampled! Both these situations are iconic, in terms of describing the impact of ongoing and impending trade wars between global trading partners.

On the one hand, there’s a battle of the unequal’s - the much talked-about US versus Canada war that’s close to home. On the other hand, there is a skirmish brewing between two heavyweights - the U.S and China. But least we forget, war clouds are also looming over the US-G7 trade relationships.

With a relative small and non-diversified economy like Canada’s, it’s highly unlikely that we will come out unscratched in any major confrontation with our biggest trading partner – the US. In fact, we’ll probably be badly battered and bruised for several years to come. However, when you add the collateral damage that Canada will face when the big guns duke it out, our chances of survival are slim to none!

The Raw Numbers

President Trump insists that Canada carries a trade surplus against his country. Canada disputes that vehemently. Whether US economists disagree with their Canadian counterparts, on whether there’s a trade deficit or surplus, is immaterial. What counts are the raw facts.

  • FACT: Canada finds itself in an unenviable position of putting most (if not all!) of its proverbial economic eggs into a single basket – that’s made in the U.S.A
  • FACT: That basket holds over $670BN worth of value for Canada
  • FACT: The CD Howe Institute has crunched the numbers exhaustively and concluded that, just as a result of the steel and aluminum tit-for-tat (“limited trade war”), Canada’s GDP could take a hit of nearly 0.33%. And what could it cost the U.S? A mere 0.02% decline in its GDP
  • FACT: CD Howe also forecasts that Canada’s economy could shed approximately 6,000 jobs as a result of this “limited trade war”, with the US losing 22,700. But let’s put that into perspective: According to the U.S Bureau of Labour Statistics, the U.S’s May 2018 civilian workforce (16-years+) stood at 161,539,000. Stats Canada’s 2017 figures show the Canadian labour force (15-years and older) stands at 19,663,000 – just 12% of the US!

Based on the raw numbers quoted above, and the relative sizes of the two economies, one thing is clear: When push comes to shove, a trade war with the US will not only push Canada to the wall, but it will likely shove us over the cliff!  But that’s not the end of it…there’s more!

What if this “limited trade war” on Steel and Aluminum spreads to other sectors too? What might that do to Canada’s economy? Well, Canada has already announced close to $16BN of US exports into Canada will be hit with counter tariffs in a retaliatory measure. And the list of items is broader than just steel and aluminium. For instance, U.S whisky, soy beans, frozen pizzas, orange juice and gherkins will be the subject of Canadian tariffs come July 1st. It is almost certain that the U.S will retaliate with an expanded list of their own!

Much more pain to come

Setting aside the US versus Canada trade war for a moment, there’s much more pain to come for Canada – this time from outside of the US. Consider the recent tariff increase by India, on Canadian lentils and pulses. These moves by India have driven up the cost of imported Canadian items from 40% to 60%. Canadian pulse exports to that country in 2016 were worth $1.1B – and that figure could dramatically reduce in the coming years!

As if that wasn’t enough, we are about to suffer additional pain – this time as collateral damage – as a trade war looms between the US and China. Like with Canada, the US has already imposed some tariffs on Chinese imports, and over $50B more are set to be announced. This could have a ripple effect:

  • China will undoubtedly retaliate…and the US will respond in kind (without a doubt!)
  • China’s economy is bound to take a hit
  • This will mean reduction in Chinese consumers’ purchasing power
  • China will cut down on its imports – including from Canada
  • Canadian exporters will suffer…leading to more joblessness and additional decline in our GDP

According to Bloomberg Economics, a global trade war could wipe out over $470 billion dollars from the world’s economies. As Canada is impacted by those ripple effects, we could suffer immeasurable collateral damage. And when we take that into account, our chances of surviving the impending trade war are slim at best. This could also spill into services, impacting: banks, law firms, tech and more.

So, what matters to Canadians?

In her acceptance speech in Washington DC on June 13th, when receiving the Diplomat of the Year Award, Minister Chrystia Freeland said:

“Facts matter. Truth matters. Competence and honesty, among elected leaders and in our public services, matter.”

Truer words were never spoken! However, what really matters to ordinary Canadians is the fact that in this David versus Goliath trade war, Canada is poised to lose. That loss will come as a result of:

  • Facts: We are a much smaller economy, with upwards of 60% of our trading relationship tied to the Unites States
  • Truth: Canada’s economy isn’t yet firing on all cylinders – unlike that of the United State’s appears to be. The slightest shock from a trade war could ripple throughout our economy, shredding any green shoots of recovery
  • Competence: Recent news that the Canada-EU Trade Agreement (CETA) could be in jeopardy, means that our leaders have not shown any competency in diversifying our economy away from the US.
  • Honesty: Every Canadian politician with an audience continues to say: “Honestly, a trade war will hurt US consumers too!”. But if we are being “honest”, we must accept the fact that any trade war with the US “will hurt Canada!”. Period. End of statement!

What matters is the fact that, instead of preparing for a post trade-war economy, most of our efforts are being expended on trying to counter US punches with pin pricks of our own. It’s time for Canadians to realize that we are already in the midst of a trade war that we will likely not survive. Best start preparing for the “day after”.