By: G. Kent Fellows
Canada’s latest volley in Donald Trump’s global trade war was launched this week, with the imposition of tariffs ranging from 15 to 50 per cent on around US$27-billion of U.S. imports.
Many prominent Canadian economists and commentators, including academics I know and respect, have argued that this retaliation is ill-advised as it will end up hurting Canadians. Such arguments come from a well-established, even foundational, economic truth: trade restrictions are costly. This means that imposing tariffs against someone who has put tariffs on us causes additional injury to ourselves.
In some respects, those arguing against retaliation are correct. Putting tariffs on American imports to Canada will hurt the Canadian economy. We will all be poorer for it. Incomes will fall, jobs will be lost and prices will rise.
That’s not an opinion, it’s an analysis informed by 250 years of academic research on free trade.
However, as in a shooting war, the act of retaliation shouldn’t be taken because it makes our lives more comfortable. Retaliation has one goal and only one goal: to make the other guy re-think his actions.
If we view the current trade talks as a one-time thing where negotiators show up, reach an agreement or not, then everyone goes home and lives with the consequences, then it probably doesn’t make sense to retaliate. But the die is not cast. There are no stable outcomes when dealing with this era of U.S. trade policy.
At this point I’d like to remind everyone: We have a trade deal with the United States. We negotiated it seven years ago. Trump himself called it “the most modern, up-to-date, and balanced trade agreement in the history of our country.” And yet on Aug. 22, Trump used section 338 of the Tariff act of 1930 to put tariffs on US$27-billion of Canadian exports to the United States.
Section 338 of the Tariff act allows the President to impose tariffs to offset “any burden or disadvantage” imposed on the U.S. economy by its trading partners. This is the first time in history that section 338 tariffs have been imposed, and Trump is imposing the highest tariff rates he is legally allowed to under the provision. Every U.S. President for the last 97 years has had the ability to use section 338 to “correct” for the “burden” Canada has placed on the United States. Why now? Might it have something to do with the fact these tariffs were scheduled to be imposed contemporaneously with planned Canada/U.S. trade talks?
I would love to trust the U.S. judicial branch here. I would love to believe that the United States Supreme Court, faced with clear evidence that Canada’s resilience in the face of Trump’s global trade war, and not a trumped-up argument about unfair trade practices, is to blame for the 338 tariffs. But I don’t believe that.
Viewed from abroad, the judicial branch of the U.S. government no longer appears to be a check on, or balance against, the powers of the executive branch. (Thankfully I don’t have to talk about Congress here.)
And so, we shouldn’t view retaliation as an action in a single trade battle. It’s not something that will be resolved so that we can go on with life, secure in the knowledge that the U.S. government will respect their country’s own laws and honour their commitments. Instead, we should view retaliation as part of a strategy. A “best response” to trade aggression. Something that we commit to whenever Uncle Sam starts rattling the tariff sabre.
Our bully to the south might continue to beat us up, but if we don’t at least try to give him the economic equivalent of a bloody nose, we won’t know whether that gets him to back off.
Lest you think I’m alone among economists here, I note that in addition to those arguing against retaliation, there are also many prominent economists that have argued for it. Including the father of modern economics.
Adam Smith’s The Wealth of Nations was published in 1776 (that date is not a coincidence; the events surrounding the Boston tea party motivated a few things). In it, Smith argues very convincingly that trade restrictions leave everyone poorer. But he also makes a specific comment on trade war retaliation that continues to ring true a quarter of a millennia later.
“There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods. To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles, which are always the same, as to the skill of that insidious and crafty animal vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs.”
Trump’s policy decisions can almost all be characterized as short-term thinking. There is perhaps no better example of this than TACO (Trump always chickens out), the term coined by Financial Times columnist Robert Armstrong in reference to a pattern where Trump would announce punitive tariffs on a country only to reverse course when faced with market reactions to his decisions.
I don’t know when or even if Trump will chicken out again. I also don’t know if Prime Minister Mark Carney will live up to Adam Smith’s vision of a “crafty animal” statesman or politician. But I do know that Canada is on the frontlines of Trump’s global trade war. We need to be strategic, we need to think long term, we need to retaliate. Adam Smith would expect no less.
G. Kent Fellows is an assistant professor of economics and the director of graduate programs for the School of Public Policy at the University of Calgary
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In international affairs, game theory recommends tit-for-tat, or "dollar-for-dollar", or fighting fire with fire, but it presupposes a rational actor pursing a clear national interest. What if Trump doesn't care about the American people, or the Republican Party, or based on recent posts, even understand the concept of money? What if retaliation - using tariffs - only acts as reinforcement learning for Trump? Maybe with someone like Trump, we should try fighting fire with water. We should be "threatening" Trump by lowering tariffs and non-tariff barriers on China and the EU. When he threatens to increase taxes on Americans we should threaten to lower taxes on Canadians.
All you need to know is that when faced with the choice between doing what is best for Canadians and what is best for their own electoral fortunes, the Liberal Party will always pick the latter. I challenge anyone to find an example otherwise, and particularly in the party's current incarnation where the pursuit of power appears to be their only goal.
I thought this was a negotiating tactic, but it's clear they saw polling that concessions and a deal we could all live with would make the party less popular than throwing it all out and going full Elbows Up supported to an infinite degree by their cheering media insisting we are at "war".
They appear willing to burn your entire livelihood and the purchasing power of the money you sell your finite life in painful struggle to obtain, to keep a bunch of lobotomized retirees in a perpetual anti-American froth thinking Mark Carney is their defending hero. Until the polls tell them otherwise, and that could take a long, long time.