By Rajan Philips –

The global tariff blackmail of the Trump Administration in Washington ran into the Canadian Sheild last week at the 45^th Parallel. After year-long efforts to salvage the legally binding free trade agreement between Canada, Mexico and the US, from Trump’s illegally executed tariffs, Canada’s Prime Minister Mark Carney said enough is enough and pulled out of all trade talks with the US. The cessation of talks is a shocking development in the geopolitics of world trade and will likely turnout to be the trade-equivalent of Donald Trump’s military misadventures in the Middle East.

Carney is now striking a defiant tone, virtually taking off from the departing hurrah of defiance of his predecessor Justin Trudeau. But Carney, unlike no other state or government leader anywhere, brings to his tone and text the sheer gravitas of a former Central Bank Governor of two G7 countries – Canada, during the 2008 Great Recession; and Great Britain during Brexit. His statement after the collapse of the trade talks has been universally called Davos II, the first being Mr. Carney’s January statement at the World Economic Forum in Davos, Switzerland.

Now he is discarding all the moderate abstractions – such as the US monetizing its global hegemony – and is calling Trump’s tariff offensive for what it is – a global blackmail. His remark that the Trump Administration signs its deals in pencil struck a chord in the US, not the White House. The Canadian Prime Minister even alluded to America’s mountain of $40 trillion debt, which the Trump Administration is dismissing as a mere a number, and added what markets do when one’s economic house is not in order. Tongue-in-check he added that Canada’s house is in order.

Sticking Points

One of the sticking points that led to the collapse of the US-Canada trade talks was the last-minute American insistence that Canada should follow the same tariff protocols as the US with common trading partners and that Canada should not pursue free trade agreements with others. That was too much of an ask. Ever since Trump began imposing tariffs on imports from Canada in utter violation of the existing free trade agreement, Prime Minister Carney has been warning Canadians that the old trade relationship with the US is over and that Canada must vigorously expand its trade with non-US partners to extra-compensate for the fallout with the US.

He has been remarkably successful, much to the chagrin of the White House, and Carney’s new defiance is receiving admiration and support from everyone who has had it with Trump. The Chinese are literally applauding, with China’s Global Times calling Canada and China “the only countries daring to respond to US pressure with reciprocal measures. In September, the Canadian Prime Minister is scheduled to address the European Union Parliament while attending the State of the Union address by European Commission President Ursula von der Leyen.

For over an year now, Trump has been striking deals with scores of countries, including Sri Lanka, all agreeing to his terms to avoid being hit with even higher tariff rates. Their implementation has been a nightmare and has gotten worse after the US Supreme Court ruled that the largest category of Trump tariffs was illegal. China has defied Trump tariffs from the outset and has been making bilateral arrangements from time to time. Canada and Mexico have been spared much of the Trump tariffs because of their free trade agreement with the US, but Trump selected specific industries, such as the auto sector, steel, aluminium and forestry products in Canada for imposing 25-50% tariffs. Lately, he added a plethora of Canadian exports from hockey sticks to paper plates for 50% tariff.

At USD 20 billion, the last category of exports constitutes only 5% of the $400 billion worth of Canadian goods exported to the US, but the new tariffs will disproportionately impact small industries and cause the elimination of about 90,000 jobs. In order to avert this, Canada intensified negotiations and was prepared to accept a certain level of tariff regime even though that would be in violation of the free trade agreement. The talks were seemingly going well and an agreement seemed to be in place with Trump announcing that a deal was all but ready for signing. Then all of a sudden and just before midnight on Friday, 21 August, Prime Minister Carney pulled the plug and ordered the Canadian team to return to Canada from Washington.

The Canadian version of the breakdown is that the Americans were bringing up new demands and restrictions at the last minute and that three of them were totally unacceptable to Canada. As Prime Minister Carney succinctly put it, “We cannot accept what they’ve offered, and we will not give what they’ve asked.” The three unacceptable asks were – to exclude specific trucks produced in Canada from tariff reduction; for Canada to apply to all of its trading partners the same tariffs that US was applying to them; and to remove the requirement for US online and streaming services to provide French summaries and labeling for their products entering Canada.

Free Trade or Tariffs

The free trade vs tariff debate is perhaps older than globalization vs nationalism. Neither binary is wholly incompatible. Free trade and targeted tariffs, not universal tariffs, can co-exist just as the new globalization and the old nationalism can and do co-exist. The bilateral experiences of Canada and the US are instructive on both fronts. For two quintessentially immigrant countries with similar pre-colonial, colonial, and postcolonial multi-cultural experiences, Canada and America are also an odd pair of countries.

Geographically, the two countries are almost equal at close to 10 million square kilometres each, and share the world’s longest border spanning 9,000 kilometres. The US population at 350 million is almost nine times Canada’s 40 million people. The economies and incomes are even wider – US GDP is $31T and per capita income $90,000 vs. Canada’s GDP of $2.3T and $56,000 per capita income. The national debts exceed the GDP in both countries – 125% in the US and 113% in Canada.

Politically, the US began as loose federation and evolved towards greater centralization and has now reached the point, thanks to the Roberts Court, of having a ‘unitary executive’ president in Donald Trump – apparently, not only for America but also for the rest of the world. Canada, on the other hand, began as a highly centralized polity and has considerably loosened over time to become a successful exponent of a bilingual (French and English) parliamentary federalism.

As political historians have noted, the state of Canada forged a nation along a railway stretching from the Atlantic to the Pacific. After World War II and the advent of the automobile and the freight truck, Canada’s sole east-west rail corridor has developed multiple north-south road connections to the US south of the border. These connections were augmented within the US by the expansion of interstate highways in the 1950s under President Eisenhower as a defence necessity against Soviet attacks. The ease and flexibility of the continental road network has facilitated the expansion of continental trade.

What began as free trade between Canada and the US in the late 1980s has since encompassed Mexico to create the largest free trading bloc in the world. The bloc has a total population of 520 million people and a GDP of $35T.  The total trilateral trade is valued at $1.9T, with Canada and the US accounting for $719T. The bloc accounts for 14% ($3T) of the world’s total exports  and 18% (18%) of imports. More than the quantum of trade it is the cross-border integration of production that has become the hallmark of the North American free trade regime. Nowhere more so than in the auto sector. Auto parts literally go back and forth across borders multiple times before they are assembled into a finished vehicle.

Throwing Rocks in the Harbour

The politics of US-Canada free trade has a chequered history. At the turn of the 20^th century, it was the Canadian Liberals led by then Prime Minister Wilfrid Laurier who promoted free trade with America which the Conservatives denounced. In 1930, the US Congress passed the Smoot- Hawley Tariff Act to raise tariffs on some 20,000 imported goods as protection from foreign competition at the onset of the Great Depression. The sponsors of the bill were Republican Senator Reed Smoot from Utah and Republican Congressman Willis Hawley from Oregon. They were egged on by the cabinet of then President Herbert Hoover and manufacturers and industrialists. Hoover denounced the bill but was forced to signed the bill by vested interests.

The external reactions were swift. Canada took the lead in retaliating against the US raising tariffs under the new law. Another nine countries joined the retaliation, many others protested, and all of them found alternative trading partners to reduce trading with the US. The upshot was to aggravate the effects of the depression impacting workers, farmers and their families everywhere. Global trade fell by 66% and the tariff law was put in cold storage. Political punishment came later with vengeance. Smoot and Hawley did not return to Congress  and the Republicans were badly defeated as was President Hoover in the 1932 election.

As well, over 1,250 economists had signed a petition asking President Hoover to veto the tariff legislation. Henry Ford visited the White House to make a special veto plea. The President agreed with all of them but signed the bill into law, nonetheless. This was also the time when the celebrated British welfare economist Joan Robinson, famously called retaliatory tariffs, in an appropriately titled essay: “Begger my Neighbours,” as the equivalent of throwing rocks in the harbour of one’s country in retaliation to other countries that have rocky coasts. But Robinson was not necessarily an advocate of free trade and she did not rule out the potential in retaliation in practical circumstances.

96 years after the Smoot-Hawley Tariff Law was enacted and jettisoned, Donald Trump resurrected it to impose 50% tariffs on imports from Canada. The Smoot-Hawley Act allows the President to impose tariffs without Congressional approval. Unlike in 1930, the current Carney government tried negotiations that have come to naught now and precipitated retaliatory tariffs on a much wider scale than in 1930. The trilateral free trade agreement between Canada, the US and Mexico (called CUSMA in Canada) that was renewed during Trump’s first term is also in suspension and there is no indication of its renewal any time soon. The Trump Administration may try a bilateral agreement with Mexico just to spite Canada, but it will have to be on Trump’s terms.

38 years ago when the first free trade agreement was reached between Canada and the US, the Canadian public was emotionally divided over it. Then Prime Minister Brian Mulroney, a conservative and close ally of Ronald Reagan and Margaret Thatcher, was castigated by critics as “a political weathervane and an economic comprador.” He narrowly won a bitterly fought elections against the Liberals by securing a large number of seats in the two provinces of Quebec and Alberta while coming second in every other province and territory. The free trade agreement turned out to be an apparent boon for the Canadian economy but the real benefits and costs are still debated. The Trump Administration and its tariffs have reignited the old debate.

Before the 1988 free trade agreement, 68% of Canadian exports went to the US, and the proportion increased to 76% over 38 years. After Trump’s tariffs the US share of Canadian exports has quickly fallen back to the old 68% as industries and businesses found alternative markets elsewhere. One of the criticisms of the free trade agreement and its continuity has been that it lulled Canadian governments and entrepreneurs to rely on the US market without exploring alternative market opportunities.

The entire thrust of the Carney response to Trump has been to explore new markets and trade partners outside the US. Thanks to Trump, Prime Minister Carney has the political wind on his back with 80% of the public supporting him in opinion polls. A new trade deal may eventually be reached but if one could be achieved during the remainder of Trump’s term is the question. The bigger question is the implication for all the trade deals that Trump has forced other countries to sign under tariff duress.

Even as the US under Trump is getting isolated in the world, Trump himself is getting isolated in the politics of his own country. People are fed up with his lack of attention to their economic woes, made worse by tariff economics, and his pre-occupation with building legacy monuments for himself in Washington. Trump’s approval ratings are down, the Republican prospects in the November mid term elections are getting worse, and almost all of Trump’s initiatives remain mired in courts with no immediate way out. On the Iran front, Trump is giving up on his military strikes that has cost the US $37.5B, and is threatening to carry out “the most crushing economic operation” targeting Iran and its trading partners. To paraphrase a more historic twist of phrase, the new threat may turn out to be – some crushing, some operation.