A trade war is a war where nobody wins. That’s especially true of a trade war between Canada and the United States.
American consumers and businesses are already suffering small but meaningful casualties, in the form of higher prices, because of the tariffs President Donald Trump slapped on imports of Canadian steel and aluminum.
And some American businesses and jobs will be hit as a result of the $16.6-billion in retaliatory countermeasures with which Canada fired back as of July 1, and which will raise prices on everything from U.S. steel to Kentucky bourbon, and thereby lower U.S. exports to Canada. The more this fight escalates, the more the economic body count will mount south of the border.
But in a quarrel between two unequally sized adversaries with highly integrated economies, Canada is always going to be the bigger loser.
That’s why, if Mr. Trump makes good on his threat to “cost a lot of money to the people of Canada,” or rips up the North American free-trade agreement, or starts dismantling the global trading rules of the World Trade Organization, the Trudeau government is going to have to think very carefully about how to respond.
In Round One, Ottawa had no choice but to fire back as it did, matching the Trump administration dollar for dollar and trying to hit politically sensitive industries and districts. But if this fight grows and spreads, simply replying to Washington’s trade restrictions with tariff-for-tariff punches of our own might not make sense.
Yes, when Mr. Trump pushes, Ottawa will always have to react. But the government has to think carefully about how best to do that, because a war of economic attrition is not in Canada’s best interests. Ottawa has to respond in ways that are least harmful to Canadians, their pocketbooks and the country’s long-term economic health.
No matter how much domestic political support the government has for getting into a slugging match with Mr. Trump, trading haymakers with our main trading partner isn’t a winning strategy.
Canada has the means to harm the U.S. economy, but in a game of barrier-raising tit-for-tat, Canada is likely to be hurt more. It’s an inescapable fact of the relationship between the largest economy in the world and the smallest economy in the G7. Mr. Trump may not know much about economics, but he appears to get that he has leverage.
As they say in boxing matches, here’s the tale of the tape.
Canada and the U.S. export almost exactly the same value of goods and services to one another – around half a trillion dollars a year each. It’s the planet’s best illustration of mutually beneficial economic interdependence; a true win-win that makes both economies more efficient, and raises living standards on both sides of the border.
That’s why a trade war between Canada and the U.S. is a losing proposition, even for the Americans. It will make both economies poorer.
But because the Canadian economy is roughly one-tenth the size of the American, Canada is about 10 times as dependent on U.S. trade as the U.S. is on trade with Canada.
For Americans, Canada is the largest export market. For every dollar of goods the U.S. sends overseas, around 20 cents worth go to Canada. As Canadian diplomats never tire of reminding politicians and business people south of the border, this country is America’s best customer.
But while we’re the top export market for 35 states, and nine-million U.S. jobs depend on exports to Canada, given the size of the U.S., Canada is still just one input into a giant U.S. economic picture.
For Canada, on the other hand, the U.S. is more than just our largest trading partner. Canadian trade with the U.S. is worth as much as that with all other countries combined. Each month, Canada sends $35-billion worth of goods to the United States – nearly as much as it exports to the 28 countries of the European Union in an entire year.
Every three and a half days, we export as much to the U.S. as we sell in a year to the continent of Africa.
And a year’s worth of our exports to China? Equivalent to three weeks of sales to the U.S.
So if there’s to be a trade war, that’s the uneven playing field on which Canada will have to fight.
More on this tomorrow.