U.S. tariff proposals are endless, but the reality or harm is likely to be less than the threats.
On April 9, U.S. President Donald Trump waffled on when the axe will fall, allowing that countries not imposing countervailing tariffs on U.S. exports (that is, imports to the threatened countries) would suffer no new U.S. tariffs at all. Confusion reigns, but the principle remains. Yet, as we’ll see here, even heavy tariffs can make existing inventories of tariffed products more profitable — and products such as tariffed cars and combines worth more if resold. One person’s tariff cost can be another’s capital gain.
Let’s consider the goods likely to be affected by tariffs. Car prices, if boosted by tariffs, are likely to rise, for they do have a blend of content from Canada, China et cetera. In turn, higher retail automotive and other prices will translate to higher values and prices for the cars and tractors, trucks, combines, backhoes et cetera we own. Used goods’ prices follow new goods’ prices.
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In other words, if the replacement cost of a made-in-America combine goes up by, say an average 15 per cent when content is fully priced, then existing combines, tractors, harrows and so on will also have some boost in value, depending on age and condition.
Some hefty components of Canada-U.S. trade are immune from the tariff axe. Services such as life insurance, banking, consulting, engineering, weather forecasting — the list is vast and all of those “goods” are immune from Trump’s tariff war.
The supposedly catastrophic effects on Canada’s sales of actual goods to the U.S. will be less than feared. The TD Economics unit of TD Bank noted in a Jan. 21 report, titled “Setting the Record Straight on Canada-U.S. Trade,” that the U.S. has a trade surplus with Canada in automobiles, though parts and some assemblies come from Canada and other countries.
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“The U.S. could conceivably shift this production stateside,” TD notes, but to fill the gap, the U.S. would have to boost vehicle production by more than 10 per cent relative to current levels. Six new plants would have to be built. “Full onshoring of all non-U.S. production would require a 75 per cent boost in U.S. production and more than US$50 billion in new investment.” Implication: it might not happen at all.
Next, consider the diluted and downstream effects of tariffs. Airfares are payment for transportation services. They are already heavily taxed and discretionary air travel is already suffering. The Canada-U.S. dollar exchange rate has become more adverse for Canadian residents headed south by air. That cost is an effective trade reducer and has little to do with any tariffs which, in any event, could be controlled by deft travel planning, such as travelling in and out of U.S. airports near the border. Considering that 90 per cent of Canada’s population lives with 100 miles of that border, cross-border travel taxes would be insignificant.
There are also questions of substitution. Canadian shipments of nickel, vanadium, tellurium and zinc to the U.S. are a small part of the finished costs of plated pots, drinking troughs for cattle and, in the case of tellurium, colours for certain ceramics products. The tariff on plating and pot colours are going to be trivial if actually imposed.
Then there is the question of shelter. A house is a product while it is being nailed together and its components may go up in price. The finished house is a capital good. Existing house prices are also likely to rise in proportion to the costs of new houses. The proportion will depend on age and condition, of course, but the principle applies to any capital goods similar to their new replacements. So, if the new house goes up 10 per cent, the existing house should rise in sympathy. After all, new capital goods turn into used goods with the flip of some calendar pages.
On a trading basis, if the new car or truck with an $80,000 price tag goes up a threatened 10 per cent ($8,000 in total), the $40,000 trade-in should rise apace, say by $4,000, cutting the pain of a new purchase by half. Existing owners can readily stretch services lives by postponing the swap. Clearly, new vehicle purchase is a manageable dilemma.
Not all spending will be so manageable. The Federal Reserve Bank of New York predicts U.S. consumers’ year-ahead expectations about their households’ financial situations have already started to deteriorate. That implies higher precautionary saving for households or reduced spending on current goods such as groceries and postponable purchases for furniture, houses et cetera.
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For its part, the Bank of Canada is dour. Bank governor Tiff Macklem predicted in a Feb. 21 speech to the Mississauga Board of Trade-Oakville Chamber of Commerce that Canadian output would shift 2.5 per cent downward. That is the aggregate view, but folks with appreciated capital goods, such as farm machinery or houses, will be able to keep their balance sheets intact and much of their spending steady.
From the U.S. point of view, there is vulnerability. Canada supplies a great deal of hydroelectric power and other energy to the U.S. — but on a diluted basis, U.S. inflationary expectations are not much changed. The Federal Reserve Bank of New York survey of U.S. consumer expectations shows a decline in inflation as consumers rein in spending, especially on capital goods like homes as debt-delinquency expectations rise.
If you see Trump’s tariff war as a man-bites-dog story, you’re right. The history of U.S. tariffs is a tale of tragedy and “we shouldn’t have done that” economics. The classic bad outcome was the 1930 Smoot-Hawley boost of all tariffs by an average 20 per cent, adding to the terror of the October 1929 Wall Street crash. Trade wars ensued. By 1933 U.S. exports had fallen by 61 per cent. At the beginning of his presidency, Franklin Roosevelt began to cut those tariffs.
There were chicken wars in the 1960s, with higher tariffs on U.S. chicken countered with tariffs on European items as varied as potato starch and cognac. Higher prices on French VSOP cognac made it more desirable — economists call this a “Veblen effect,” named after Thorstein Veblen, the University of Chicago economist who showed that luxury goods’ sales rise when their prices rise. For these goods, rising price seems to imply greater desirability.
Then there were lumber wars, which still continue today with Trump tariffs threatening 25 point boosts to existing 14 per cent tariffs on softwood. Then came Japanese car tariffs in 1987, levies on bananas in 1993, steel tariffs up to 30 per cent on European products and existing tussles on Chinese solar panels.
Tariffs help few and hurt many, but can be managed with experience and imagination.
