TRADE RETALIATION: THE “MOOSE” THAT ROARED?
Trade disputes have a way of eliciting knee-jerk responses, where governments raise the noise level and flex whatever retaliatory muscle may be available to them. And while this may be gratifying to politicians in this age of “narcissistic populism” — as Justice Rosalie Abella recently coined in her commencement speech at Brandeus University in Massachusetts — the tools of trade retaliation are blunt and imprecise and decidedly messy.
And Canada and the US are not immune to a little messiness every so often.
For the record, Canada and the US have enjoyed a special bilateral relationship, sharing the world’s longest international border with limited fuss. For the most part, our bilateral trading relationship along “the 49th Parallel” has been exceedingly positive and mutually prosperous, enshrined first by the Canada-US Free Trade Agreement in 1989 and later the North American Free Trade Agreement (NAFTA) in 1994.
Bilateral trade between Canada and the US is worth in excess of US $635 billion (in 2016). Nearly nine million US jobs depend on trade and investment with Canada, and a preponderance of those reside in US states that were critical to the electoral college victory of the current US Administration.
Those are the kind of numbers that are reflective of a relation- ship borne of proximity , where cross-border movement of people, goods, services and investments speak to an economic interdependence. Where sector growth and competitiveness on both sides of the border are rooted in supply chain integration, whether we are talking beef or pork or autos.
When it comes to trade disputes, however, these aren’t the numbers that count.
Mutual benefit does not equate to mutual dependence. While Canada accounts for about 18% of total US exports, the US is Canada’s primary export destination capturing over 76% of total exports. The next largest market destination for Canadian goods is China, at just over 4% of total exports.
Juxtapose that reliance against that of the US, where it’s top 15 trading partners account for a little over 73% of total exports.
With a US population of over 324 million and a GDP of US $18.56 trillion, Canada’s
market of 35 million peeps and US $1.5 trillion GDP is hardly comparable.
Despite various efforts to diversify trading partners, the US has been Canada’s overwhelming go-to dance partner since the late eighties. In trade relations, you just can’t beat location… or the allure of a concentrated market.
Take the Great Lakes region, which alone is home to 105 million people, generates a regional GDP of US $5.8 trillion (or roughly 28% of combined US and Canadian economic activity), and supports 46 million jobs (or almost 30% of the combined US and Canadian workforce).
All within a one day drive radius for any transport truck. Now that is some serious market allure.
So when it comes to trade disputes with the US, Canada is most certainly in way above its (economic) weight class.
The new US Administration’s America First trade agenda has added some tension to the relationship, to be sure. Recent US pronouncements on BC wine, on dairy, on softwood, on steel, on airbuses, on ‘Buy American’, on tearing up or renegotiating the NAFTA — cumulatively these have put Canadian governments, federally and provincially, on high alert.
The Canadian government reaction has been full-court press, and rightly so.
In the lead-up to the recent BC provincial election, Premier Christy Clark threatened to implement a ban on thermal coal exports traveling through BC ports to Asia (94% of which originate from the US) in retaliation for implementation of US softwood lumber duties. The Prime Minister agreed to fully consider that option.
Also, the federal and BC governments are collaborating on collecting evidence to support the prospect of applying Canadian duties on purportedly subsidized Oregon products such as plywood, flooring, wood chips, packaging material and wine.
US Commerce Secretary Wilbur Ross issued a stern message in response suggesting that retaliatory threats by Canada were “inappropriate” and that the DOC’s decision to impose preliminary duties on Canadian softwood lumber was “based on the facts presented, not on political considerations”.
Secretary Ross is the co-author of a trade policy paper for the Trump campaign which argues that international organizations like the WTO do not supersede US law or “American sovereignty over matters of trade policy”. So when Secretary Ross starts sounding like the thoughtful defender of the rule of law…
Ontario has jumped into the retaliatory fray as well. In successfully dissuading New York State from adopting a ‘Buy American’ provision in its March budget, Ontario lobbied Albany congressional lawmakers extensively. The Province also let it be known that if the NYS measure passed, Ontario would be prepared to retaliate with in-kind measures of its own.
The federal government is also reported to be considering potential retaliatory responses to ‘Buy American’ procurement measures, such as restricting the use of US iron or steel in federally-funded infrastructure projects.
To be sure, much of this “retaliation” bluster is just that, bluster. The “moose” that roared.
As Secretary Ross put it in his trade manifesto: “America’s major trading partners are far more dependent on American markets than America is on their markets”. Harsh, but true.
In recognition of this harsh reality, the real energies and resources of Canadian governments are being put into government-to-government relationship building and on-the-ground advocacy. This strategy is critical and laudable.
The real prize is landing a bilateral deal that will add stability to a relationship that both sides see significant merit in pre- serving. This is the aim in resolving the softwood lumber dispute (for the fifth time running). This is the aim in renegotiating and ‘modernizing’ the NAFTA.
Establishing an agreed-to set of rules to manage future trade relations adds much needed stability and predictability to the equation, allowing businesses in both countries to get on with doing what they do best — doing business.
For Canada, setting out the parameters for future trade relations with its market-largesse-gifted neighbour is a necessity, an equalizer of sorts. Trade rules tend to minimize political grandstanding.
Trade rules make retaliatory action allowable only when warranted under certain fact-based circumstances, and limit that action to that which is authorized within the rules — like dumping or countervail duties, or actions in the event of non- compliance with established commitments.
Trade rules are essential to countries like Canada that find themselves up against a super heavyweight. It is somewhat akin to the addition of gloves, head guards and a referee to a fight. The result may still be one-sided, but at least anything under the belt is disallowed.
Retaliatory action is attractive to many governments because it signals action on behalf of a home industry feeling harmed. But keep in mind that border duties end up being paid by importers (local companies) who pass on the increased expense to local consumers. And for those that cannot adjust to the increased input costs, local jobs are placed at risk.
As I indicated earlier, messy.
A past life has taught me that real solutions to bilateral trade disputes comes from industry-to-industry dialogue. Often the dispute is borne of misunderstanding or a lack of knowledge or empathy for the producer/processor/manufacturer operating in the other jurisdiction. Much can be accomplished through a simple conversation.
Retaliatory measures tend to place a chill to any attempt at bilateral dialogue.
And Canadian governments know this. You can just see them reach for the boxing gloves marked “retaliation” while whispering to those within earshot: “Hold me back. Someone. Anyone.”