Enormous uncertainty: Despite tariff pause, North America’s integrated economy remains in jeopardy

Donald Trump put his threat to implement sweeping tariffs against Canada and Mexico on hold Monday, but the future of North America’s integrated economy remains uncertain given the U.S. President’s willingness to hold it hostage to achieve political ends.

 

On the weekend, Mr. Trump said he would impose 25-per-cent tariffs on imports from Canada and Mexico, with a lower 10-per-cent tariff for Canadian energy imports. On Monday, he said these levies would be delayed 30 days after Mexico and Canada agreed to do more to improve border security.

 

Mr. Trump’s backpedalling avoids an all-out trade war – at least for now. But it leaves continental trade on a shaky footing, with trust damaged and companies still stuck in limbo.

 

“Even the threat of tariff policy acts as an uncertainty tax on Canadians and limits their ability to move forward with bold projects or even incremental economic decisions,” Royal Bank of Canada chief economist Frances Donald said in an interview.

Mr. Trump’s tariff threat – which will continue to hang over Canada and Mexico – cuts directly against decades of North American integration that started with the Canada-U.S. Auto Pact in the 1960s and accelerated with the North American Free Trade Agreement (NAFTA) in the 1990s.

 

It also calls into question the United States’ acceptance of the rules-based global trading order carefully constructed since the Second World War.

 

Mr. Trump has threatened tariffs against European and Asian allies and adversaries alike, raising the prospect of spiralling tariffs and countertariffs last seen in the 1930s. And he has tasked his administration to come up with a range of protectionist measures by April 1, including tariffs, aimed at shrinking the size of America’s trade deficit with other countries.

 

Crucially for Canada and Mexico, Mr. Trump has kicked off consultations for the renegotiation of the United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA in 2020 and which is up for review next year. Despite signing the treaty during his first term in office, Mr. Trump has expressed skepticism about the deal and ordered his administration to “make recommendations regarding the United States’ participation in the agreement.”

 

Perrin Beatty, the former chief executive officer of the Canadian Chamber of Commerce, said the Canada-U.S. relationship has been predicated on the principle that what’s good for one country is good for the other. Over the span of two weeks, Mr. Beatty said, the U.S. President has upended that guiding principle.

 

“We simply can’t count on the goodwill of the U.S. administration,” he said. “What he’s indicated to us is that his obligations under [the USMCA], his obligations under the [World Trade Organization] are meaningless to him if he wants to use tariffs or other instruments as a means of forcing Canada to bend to its will.”

 

The threat to Canada, which sends nearly 80 per cent of its goods exports to the United States, remains severe. The Bank of Canada estimated last week that a 25-per-cent tariff on all imports, combined with retaliation, could reduce the pace of Canada’s economic growth by four percentage points over the next two years, pushing the country into a significant recession. Bay Street economists have published similar estimates.

 

Beyond the immediate impact a trade war would have on exports, jobs and prices, Mr. Trump’s erratic approach to trade could be a major impediment for investment in Canada, said John Weekes, a former trade negotiator who led Canada’s NAFTA negotiating team in the 1990s.

 

“We now have a situation where investors are faced with this enormous uncertainty,” Mr. Weekes said in an interview. “And this is not just foreign investors. Canadian investors are going to think, ‘Well, why would I build my plant in Chatham if I can do it in upper New York State and have access to a much larger market guaranteed and probably still be able to sell it in Canada?’ … I think long-term this could tend to force Canada into sort of backwater status.”

 

The United States has a stronger hand in any trade war with Canada, given that a smaller proportion of its economy relies on international trade. However, U.S. businesses would lose customers if Canada and Mexico retaliated with their own tariffs, and American consumers would pay more for imported goods. The Washington-based Peterson Institute for International Economics estimates that a trade war with Mexico and Canada would cost the average U.S. household more than US$1,200 a year.

 

Moreover, a protectionist turn by the U.S. will make its companies less competitive, said Daniel Trefler, an economics professor at the University of Toronto whose research focuses on trade. Tariffs make inputs to manufacturing more expensive, and an effort to shift factories from Canada and Mexico to the U.S. would push up labour costs.

 

“If I were an American auto company, I’d close. I’d just sell it,” Prof. Trefler said in an interview. “This is the death knell for the American automotive industry. There is no other jurisdiction on the planet where there’s a major automotive sector without access to cheap labour: None, zero.”

It’s also far from clear that Mr. Trump can achieve his goal of pulling huge amounts of capital into the United States at the expense of America’s trading partners. The U.S. economy is already running hot, with low unemployment and inflation still above the U.S. Federal Reserve’s target.

 

“There’s very little labour capacity to be able to absorb anything new,” said Peter Hall, CEO of Econosphere Inc. and the former chief economist of Export Development Canada. “So, you can imagine that if all of a sudden there are a torrent of Canadian, European, Mexican, maybe even Chinese businesses trying to get a footprint in the United States, they rush in at a time when there are no people and when there are going to be less people because there are going to be deportations.”

 

The United States has legitimate trade grievances, particularly with respect to China and other non-market-economies, and it foots the bill to a disproportionate degree for military efforts needed to keep the world’s trading lanes open, Mr. Hall said. But threatening to blow up the global trading order to address these concerns is risky business.

 

“A new trade paradigm would be a very costly paradigm. The truths that we have experienced about the benefits of globalization would be revealed all too late,” Mr. Hall said.

 

 

 

 

This article was first reported by The Globe and Mail