A super-sized Brexit
Trump takes the US out of the international trading system
Trump Aides Want to Hit Mexico, Canada With Tariffs Before Talks. Gavin Bade, Vipal Monga, and Paul Vieira, January 26. Yes, he’s serious.
With Trump threatening tariffs, he’s suddenly made it much more difficult for businesses to make long-term cross-border investments. It’s basically a super-sized version of Brexit.
Trump’s goal appears to be bringing manufacturing back to the US, even if that means short-term disruption (especially for the North American auto industry) and a smaller US economy in the longer term. He also sees tariffs as a source of revenue which can be used to cut taxes.
Paul Krugman, How to Damage US Manufacturing, January 27:
Much international trade is the result of long-term planning. To create something like the modern North American auto industry, a deeply integrated system in which various components of a finished car may be manufactured in all three countries, with parts sometimes crossing the border seven or eight times, businesses needed to make a lot of cross-border investments and carefully restructure the geography of their production.
They were only willing to make those investments and engage in that kind of long-term planning because NAFTA gave them confidence that more or less free trade in North America was a settled issue. Now, suddenly, it seems that this confidence was misplaced.
From the WSJ article:
This could be a wake-up call for investors and businesses. Goldman Sachs told clients last week that there was only a 20% chance that Trump would impose tariffs on Saturday, noting that he had made similar threats in the first term but didn’t always follow through. But Trump is amenable to the tariffs-before-negotiations strategy, according to people familiar with the discussions, though no final decisions have been made.
The president has tangled with both countries before and doesn’t feel that Canada and Mexico are taking his threats seriously, some advisers said. He wants to hit them with tariffs first to prove he isn’t bluffing, these people said, and to drive them to the negotiating table on a number of issues, from migration to drug smuggling and reforms to the U.S.-Mexico-Canada Free Trade Agreement to encourage more manufacturing in the U.S.
The Canadian and Mexican perspective:
The tariffs-first approach may help explain why Canadian and Mexican officials have been frustrated in their attempts to reach out to Trump’s economic team — most of whom aren’t in office yet because they haven’t been confirmed by the Senate. The trading partners are quietly expressing confusion and bewilderment, saying they aren’t even sure what Trump wants, particularly since they argue that Canada has taken action to address border security and Mexico has worked to stem migration into the U.S., two of Trump’s main irritants.
What happens next:
The tariff threats risk setting off a continental trade war. Canada has been prepping a list of what it considers would be retaliatory trade moves if Trump acts first. Some in Canada believe such a skirmish could tip their country into a recession if tariffs stay in place too long.
The Canadian government has been trying to reach out to the Trump administration, a Canadian official said, but feels frustrated by the fact that many of the top points of contact, such as Lutnick, haven’t been confirmed and aren’t in their seats. Canada was ready with retaliation measures on Inauguration Day, the official added, when many feared Trump would impose tariffs, and is ready to “press play” if there is a move on Feb. 1.
What if retaliation fails?
Premier Smith is right that restricting oil exports is a bad idea. Here’s a better option. Trevor Tombe, The Hub, January 22. Tombe (a respected economist) observes that oil exports account for a tremendous share of Canadian value-added. He argues for reforms to encourage more investment in Canada, offsetting the impact of Trump’s tariffs. Tombe on the Herle Burly podcast.
From an economist’s perspective, trade is win-win; restricting imports is shooting yourself in the foot. So why retaliate? It’s intended to put pressure on the other country by hurting households and businesses there.
I think the biggest question is, will retaliation convince Trump to drop the tariffs, or not? If it’s effective, then it seems worthwhile for Canada to pursue retaliation even if it’s costly. If Trump can’t be convinced to drop the tariffs this time around, unlike the first time, then Tombe’s argument makes sense.
In this case, to return to the Brexit analogy, it’s a bit like Brexit’s been imposed on Canada. It’s not just the tariffs; Trump’s sheer unpredictability is cutting us off from our most closest and most important export market. We’re going to have to pursue trade elsewhere:
Between provinces, by reducing internal trade barriers. It’s never been more urgent to get rid of Canada’s internal trade barriers. Here’s what we need to do. Anita Anand, Toronto Star, January 30. One of the advantages of trade is economies of scale. Without the economies of scale that come from access to the US market, we can at least maximize the scale of the Canadian market.
With Europe, through the CETA agreement.
With Japan, Vietnam, Malaysia, Singapore, and Australia, through the TPP agreement.
With the UK, through the TPP. (The UK just joined the TPP.)
With Mexico, Peru, and Chile, through the TPP.
The LNG Canada project is already underway, to ship LNG out of Kitimat to Asia. It’s expected to be up and running this year.