Guarding Wealth: Farmers would be hostages in a trade war

Canadian farmers could suffer from American initiatives to shut borders to imports

Donald Trump’s elevation from businessman to American president could injure Canadian farmers gravely. Little is known of his plans, less of the laws he may try to push through the Congress and executive orders he may issue. But trade war is on the table and through no fault of their own, Canadian farmers may be caught in the middle as hostages to trade ideas that went out of fashion decades and some even centuries ago.

President Trump’s announced plan to impose a border tariff on goods manufactured by American-headquartered companies and sent into the United States will, if enacted into law, have the effect of raising their prices. To date, he has discussed consumer goods like cars, insisting that a Ford assembled in Mexico with a landed price of $30,000 in the U.S. would cost $40,500 before dealer shipping costs, profits, etc. are added and would be more profitably sold if made in America at any price below the tariff-laden price. Case closed? Far from it.

There is the matter of retaliation. We have no idea of what our government might do if Ontario, for example, has its auto parts and assembly business sent to the United States. Canada, even if for just political reasons, would be likely to retaliate by imposing new tariffs on goods and products made in the U.S. This would be like calling smaller markets with smaller economies of scale good and larger markets that result in lower consumer prices bad. Ultimately, the question is “whose ox would be gored?”

World-wide, trade retaliation would fragment markets, leading to higher consumer costs for mass market products. Canadian farmers would not escape the carnage — other countries would be likely to impose quotas on our grains and oilseeds or, which is much the same thing, charge tariffs when our wheat and canola crosses their borders. Brexit could lead to other devolutions that have been named Frexit (France) and the whimsical but very real Czechout for the Czech Republic. Canexit from trade treaties could be forced on Ottawa for lack of any better response to Trumped trade.

There would be some industries exempt from much damage. Companies making unique or patented goods the prices of which they can set at will would probably suffer little harm. If your tractor or combine needs a part made only in the U.S., you pay what you must. But if border taxes on grains entering the United States raise the cost to buy the Canadian product, American food processors would presumably buy similar products within the United States. The irony of trade wars is that higher tariffs would hurt lower income Americans living in small towns, the folks who spend most of their money on food and clothing and just get by, far more than it would hurt upper income people who spend relatively little of their income.

A sea change

The world has gone through six decades of tariff reduction since the European Coal and Steel Community was founded in 1951 with the participation of the Netherlands, France, Belgium, Luxembourg and West Germany. It was the seed for what bloomed as the Common Market and then as the European Union.

The North American Free Trade Agreement, NAFTA, which came into effect on January 1, 1994, is vast, complex, and beneficial. The general level of prosperity of the U.S. and Canada rose in the following 22 years, helped by NAFTA and, of course other forces such as productivity boosts from technology. NAFTA’s concept turned westward, the Trans Pacific Partnership, opens new markets to goods, including foodstuffs. If all these trade agreements are shredded by or because of the United States, then a great many products made in Pacific rim countries such as Japan (China, however, is not a member of the TPP) will cost more in North America. Products made in America and in Canada would lose markets in Asia. Clothing made in Asia would cost more in America and probably in Canada too.

Will the vast middle-American electorate that stepped up for Mr. Trump recognize that trade wars started by made-in-America punitive tariffs turn around and demand that he not start trade wars? Perhaps, but it will be a matter of education. Wrecking NAFTA and the TPP will provoke retaliatory tariffs that close doors to American goods.

The harm won’t be evenly felt. Some American and Canadian consumers will pay more for made-in-America goods, but it may not hurt as much as the harm suffered by lower income people in Asia and Africa. What counts is symmetry or, in fact lack of it. It helps to remember than 95 per cent of the world’s consumers reside outside of the United States. Trump has not gotten this point yet.

President Trump’s government will not be a one-man show. Experienced heads at the less visible levels of diplomacy and trade are likely to explain that beggar thy neighbour trade rules also beggar thyself. Some rule changes, such as liberalization of environmental controls on carbon emissions, might have short-term benefits to the bottom line of power companies even if rule relaxation ultimately harms the planet.

How the balance tips is going to be hard to predict. Farmers, as buyers of big-ticket capital goods, would be hurt if machinery imports from the U.S. are hit with tariffs raised by the Government of Canada retaliating for loss of auto parts business. Canadian consumers would be hurt by a rise in tariff costs for imported American packaged food products. The irony of our trade-dependent economy is that there would be no reciprocal tariffs on American citrus products, for a rational Canadian government would presumably not try to shelter the non-existent Canadian grapefruit industry. Canada would be in an unequal trade fight with its larger neighbour.

Retaliation?

It is very early for making accurate predictions for U.S. trade changes and what might be Canadian retaliation. Clear heads in American and Canadian trade policy would presumably try to retain the benefits of tariff reduction while negotiating enough advantage to satisfy Mr. Trump.

And if that does not work, there is the reality that no American factory can rival Foxconn Technology Group, the Taiwan-headquartered maker of vast numbers of electronic goods. Its factories employ as many as 240,000 people (some head counts are twice as high) on one “campus,” assembling Apple cell phones and gadgets for Kindle, Nintendo and others. The reality is that high tech manufacturing has become an Asian specialty good. Routers and cell phones, PCs and tablets could be made in Detroit for costs far higher than those in China. Rebooting the economics of consumer electronics would be a world changing process.

And yet, if that does not work and Canadian wheat hits an American tariff wall, if made-in-USA packaging rules such as source labelling impair our markets, Canadian farmers, especially those on the Prairies, will be in harm’s way. After all, most of Western Canada’s grains and oilseeds are headed for export markets. Trade wars are not in our national interest. One can hope that when populist rhetoric is seen as a threat to global markets and integration, governments will come together to ensure that international trade remains robust.

About the author

Columnist

Andrew Allentuck’s book, “Cherished Fortune: Build Your Portfolio Like Your Own Business,” written with co-author Benoit Poliquin, was recently published by Dundurn Press.

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