"RETALIATORY TARIFFS - STILL A BAD IDEA?
UNILATERAL FREE TRADE WOULD BE A BETTER ECONOMIC IDEA
The trade relationship between the United States (“US”) and Canada has eroded with tensions devolving into a trade war.
As of today, the US imposed tariffs on Canadian goods appear to be "off again" until April 2nd, but Canada's first round of "retaliation tariffs" are still "on" ("CT-R1"). That is strange. Canada is "on" despite no current US tariffs to retaliate against? Is Canada now the sole aggressor?
Should this on-again-off-again trade war continue to escalate, the US will likely impose even further reciprocal tariffs on Canadian goods, along with additional tariffs on Canadian steel and aluminum products, and timber, lumber and derivative products. In turn, Canada is planning to implement a more robust second round of tariffs targetting an additional $125 billion in US goods ("CT-R2").
While Canada’s strategy here appears – present circumstances excepted – to be largely "defensive" in nature, to us it is also at odds with economic theory. And to turn a recent Trudeau quote about Trump around on his own government, may just be a real bad idea.
Canada’s Retaliation – Round Two
While CT-R1 remain in effect, the Department of Finance Canada has opened the 21-day public consultation period with respect to CT-R2.
The proposed list of targeted goods for R2 contains 4416 tariff items, and is open for comment by businesses, stakeholders, and Canadians until March 25, 2025. Implementation is expected shortly after that, but will likely depend on the status of the US tariffs position.
Notable items listed in CT-R2 include:
- Steel and Aluminum products;
- Motor vehicles and Vessels;
- Helicopters, Airplanes, Spacecraft;
- Pulp & Paper products; and
- Certain Vegetables, Fruits, Meats, and Dairy products.
Retaliation Not the Answer!
Should the Trudeau Liberals – who have effectively taken Canada's elected Parliament out of the equation through prorogation – proceed with CT-R2, Canada can probably expect even higher Trump Tariffs, under the reciprocal provisions in the original US Order, causing even greater damage to Canada.
In this light, Canada's strategy may not make much sense. Fights against larger competitor usually don’t end up well for the small guy, and Canada is the small guy here, at least economically.
Worse, one begins to wonder whether our federal leaders missed an important class in Economics 101, where the economic theory of “comparative advantage” was discussed and which may well provide a strong rationale for Canada not proceeding with ANY retaliatory measures whatsoever. Under this theory, pursuing unilateral free trade would permit Canadian businesses to develop their own manufacturing competences and leverage that to diversify away from US markets, becoming more globally competitive. Indeed, a recent Montreal Economic Institute Report suggests JUST THAT!
Unilateral trade liberalization is also estimated to boost Canada’s gross domestic product by 1.67% and cause price levels to fall by 1.51%. Think about the job saving and additional pocket-money that entails for ordinary Canadians in a time of need!
Canada is imposing Retaliatory tariffs, which may well be a REAL bad idea.
Takeaways
One is hoping for a peaceful end to Canada's current trade war with the US, but Canadian politicians seem all-in on a strategy of "retaliatory tariffs". That strategy may be at odds with economic theory, and in the end, a real bad idea.
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