Photo: ANDREJ IVANOV / AFP via Getty Images
The big news last week was the latest act in the U.S.-Canada trade drama. (The smaller news was Trump’s easing of import restrictions on ground beef, to the irritation of ranchers, which was an implicit acknowledgement that tariffs actually do raise consumer prices.) The latest act of the Canadian drama was occasioned by the August 19 expiration of the required 30-day waiting period before the Section 338 50 percent tariffs could go into effect. The initial outcome was predictable—a last-minute reprieve coupled with announcement of a deal that only needed several more days to be finalized. The next act—the collapse of the talks—was not. Typically, each side blamed the other for moving the goal posts at the last minute, inserting new demands or reneging on previous commitments. Usually, the truth is that both sides are at fault. In this case, Canadian Prime Minister Mark Carney pulled the plug and subsequently announced retaliation intended to match the U.S. action, effective September 8.
As discussed in last week’s column, the U.S. tariffs were a leverage move designed to speed up negotiations with Canada over existing bilateral grievances. They were also a message to other countries that trade retaliation is a bad idea. There was more than a bit of hypocrisy here. Canada retaliated against the United States’ manifestly unfair unilateral tariffs. The U.S. response was to call Canada’s action unfair and then take an even more unfair action in the form of 50 percent tariffs. This is a classic bullying tactic, and Trump has gotten away with it for everybody except China and Canada. Whether Canadian resistance inspires others remains to be seen.
The leverage move revived the negotiations and caused both sides to put some serious offers on the table. That was a good thing. As the last 50 years of U.S. trade negotiators would attest, Canadians are very tenacious negotiators. They cling to their subsidies and supply management policies, make concessions grudgingly, and then look for ways to mitigate them. This is why irritants such as lumber and dairy policies have been around so long without resolution. Canada, of course, would say the same thing about the United States, particularly under the current administration.
Details of the failed agreement are sparse. It appears the United States agreed to lower its tariffs on steel and aluminum from 50 percent to 25 percent, with steel subject to a tariff-rate quota, and on autos from 25 percent to 15 percent, while Canada ideally wanted a return to zero and particularly wanted assurances that certain trucks would be included in the tariff cuts. In another burst of irony, Trump bragged that Canadian tariffs on U.S. imports would be “eviscerated,” conveniently ignoring the fact that thanks to the 1980s free trade agreement with Canada, followed by NAFTA and the United States-Mexico-Canada Agreement (USMCA), Canadian tariffs were zero for the past 40 years—until Trump invited their retaliation. So, the Canadian “concession” would have taken them back to where they were before Trump took office, while the United States was not willing to do the same, particularly for steel, aluminum, and autos. From Canada’s perspective, the U.S. offer was not good enough. It was also a miscalculation of Canadian politics. The U.S. actions have pushed Canadian outrage to record levels, and there is extraordinary pressure on Carney to push back. The harder the United States presses, the more difficult it is for him to make concessions. An underlying factor was the Canadian concern about Trump’s unreliability—that no deal is ever final and that he will inevitably come back for another bite. Carney’s comment was that the U.S. signature is sometimes “written in pencil.”
So far, this has not been a TACO (Trump Always Chickens Out) moment, although the delay in implementing the Canadian tariffs gives him another opportunity. Trump was following his now-predictable path of making extreme demands and threats and then eventually settling for a fraction of what he demanded, still leaving him better off than where he started. Canada, unlike others, called his bluff, which will probably lead to further U.S. retaliation, since Trump’s initial reaction to any resistance is to double down on his position. If he persists, there will be two immediate consequences. First, Trump will have destroyed one of the world’s longest-lasting, most cordial cross-border relationships. It will take a very long time to rebuild that. Second, he may also have killed the USMCA. He will likely try to reach a bilateral agreement with Mexico and leave Canada out in the cold.
All of this will be bad for North America. All three economies, which have spent the last 30 years integrating, will suffer. Costs and prices will go up, adding to inflation in the United States and slowing growth in all three countries. One of the faults of the current administration is that it is treating its friends worse than its enemies, and there is no better example of that than Canada. Last week’s drama was not a TACO moment, but it was certainly not a moment Americans should be proud of.
William A. Reinsch is a senior adviser (non-resident) and Scholl Chair emeritus with the Economics Program and Scholl Chair at the Center for Strategic and International Studies in Washington, D.C. He can be reached at [email protected].
