The recent development in the ongoing commercial dispute between the United States and Canada has seen a surprising shift of strategies. Previously, Canadian authorities had been quick to retaliate whenever U.S. President Donald Trump imposed tariffs. However, in a stark departure from this tactic, Prime Minister Mark Carney has opted not to engage in tit-for-tat tariff imposition following the U.S doubling tariffs on steel and aluminum, despite the pressures from various trade and labor organizations, including Premier Doug Ford of Ontario.
Interestingly, Ottawa announced several exceptions in April, effectively softening the impact of some of the tariffs Canada had earlier placed on U.S. goods this year. This more calculated response ushers in a fresh stage in the complex trade dispute, as discussions between Carney and Trump have transitioned from public posturing to private negotiations.
This could also signal a reflection of the mind of a former central banker operating from the prime minister’s office. It is a widely held belief among economists that the application of tariffs often deals a more severe blow to your own industries and consumers than those of the adversary, whether you instigate the conflict or just react defensively.
However, the Canadian government’s decision to impose tariffs on an estimated $90 billion worth of U.S. goods, then subsequently provide exclusions for certain key sectors and inputs utilized by Canadian manufacturers, has led to a sense of uncertainty and operational difficulty for several Canadian businesses. Thus, these two contrasting strategies carry inherent risks.
As the rapport between Prime Minister Carney and President Trump undergoes a reset, and negotiations commence, there is no assurance that the President will engage with sincerity. Furthermore, Ottawa’s gentler approach has made the government vulnerable to political backlash, and could potentially spark tensions between Mr. Carney and influential provincial leaders whose support is crucial to his position.
In the immediate aftermath of President Trump threatening a comprehensive 25% tariff on all goods imported from Canada post his election last year, Ottawa reverted to a well-worn tactic. Back in 2018, when Trump levied tariffs on steel and aluminum, then Prime Minister Justin Trudeau responded by imposing a selection of countervailing tariffs targeting delicate sectors in U.S. states under Republican control.
The objective was to exert significant pressure on key American exporters, with the expectation that they would vent their exasperation towards their respective representatives in government. Simultaneously, efforts were taken to lessen the fallout for Canadian importers and buyers. This tactic yielded the desired results and the U.S. defence sector subsequently underscored the imprudence of escalating the costs of metals required for manufacturing tanks, fighters, and warships.
After a year-long standoff, President Trump eventually lifted the tariffs. Most recently, Statistics Canada released data indicating a 15.7% fall in merchandise exports to the U.S. between March and April. However, imports from the U.S. decreased by 10.8% during the same period. A significant portion of this drop can be attributed to businesses rushing to move their goods across borders prior to the tariff imposition. This has allowed companies to maintain price levels for consumers, but these inventory reserves are dwindling. This trend is under close scrutiny from the Bank of Canada in order to evaluate the inflationary impact of retaliatory tariffs.
Moreover, the data from April provides evidence that several U.S. products targeted by countervailing tariffs have been affected. For instance, lawnmower imports saw a 50% reduction compared to the previous year, and unfrozen orange juice shipments to Canada dropped to their lowest in over two decades.
When then Prime Minister Justin Trudeau announced the initial $30 billion in countertariffs back in March, there was an understanding that corporations unduly impacted by the tariffs could apply for a waiver or what the government calls remission. This emphasizes the fact that counter tariffs have actually pained many Canadian businesses and consumers. Tariffs are indeed tariffs irrespective of who imposes them, they are borne by importers and typically passed onto consumers.
The tariff revenue in March was 22% higher than the peak month during the first trade war with the U.S. under Trump’s administration in 2018. However, if one adjusts for the growth in imports since then, import duties in March accounted for just 1.5% of total imports. This figure includes duties from all countries, even though the U.S. is responsible for half of all Canada’s imports.
It remains unclear as to whether the Carney administration will reach $20 billion in tariff revenue, as predicted by the Liberal Party platform. They insist that tariff revenues will be redirected to industries hit hardest, however, there are still uncertainties about how this will be achieved.
Currently, the government seems to be drawing from their Covid-19 strategy, albeit on a much less grand scale, by expanding Employment Insurance eligibility, underwriting wages, and pledging loans for struggling businesses.
Looking forward, the Canadian government, under the leadership of Mr. Carney, faces a challenging task of deciding whether to push back against Trump’s moves or take a more diplomatic approach. As stated by Jessica Horwitz, a partner at Bennett Jones law firm who specializes in trade law, it is essential that the decision-makers improve their communication to ensure transparency and clear guidance. This unpredictable period poses significant challenges for businesses craving stability and forecasting ability.