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The term trade war has been thrown around a lot recently. With US President Donald Trump enacting tariffs against steel imported from around the world and with Canada reacting with tariffs of their own, its safe to say that Canada and the US are currently embroiled in a trade war. Today we’ll look at what a trade war is, how it came to be, and what could come next.
What is a Trade War?
A trade war occurs when Country A place duties on imported goods from Country B. Country B responds by placing duties on goods imported from Country A. The point of these duties are to raise the prices of the goods being sold to consumers so as to make them more expensive to make consumers choose alternative goods. So President Trump raised duties of 25% on Canadian steel to raise prices of steel imported from Canada to make American steel relatively cheaper.
Why did the Trade War Start?
The origins of this trade war are rooted in the 2016 American election. Then Republican candidate Donald Trump made his feelings regarding the North American Free Trade Agreement (NAFTA) very clear. He repeatedly called NAFTA the “worst trade deal ever signed”. After winning the election and despite the wishes of Canada and Mexico, Trump notified the world that NAFTA was being renegotiated.
In March of 2018, after months of unsuccessful negotiations, Trump announced to the world that he was enacting tariffs on steel and aluminum imported into the US, but gave temporary exemptions to close allies Canada, Mexico and Europe. The exemptions were extended a couple of times until Trump decided on May 31, 2018 that NAFTA negotiations were not going well and in the name of national security, removed the exemptions given to Canada, Mexico and Europe.
In response, Canada has prepared a list of items that are imported from the US that will be subject to duties of 10% or 25%. That list, ranging from iron and steel products to whiskies can be found here. These duties will come into effect as of July 1, 2018. The intention is to raise the cost of importing the specified items from the US. Currently the Department of Finance Canada is seeking comments from the public in response to the proposed duties.
What Comes Next?
President Trump is trying to pressure Canada and Mexico into agreeing to a new NAFTA that is less “fair” and more beneficial to the US. Canada is caught either agreeing to a less favourable deal or raising tariffs on its largest trading partner. With Mexican general elections happening in July there will not be any NAFTA negotiations anytime soon. Trump could respond to Canada’s duties with additional duties on other items, such as a 25% tariff on cars as he’s mentioned. Or Canada could add tariffs to more items. Trump has also signaled a willingness to negotiate bilaterally with each country to obtain separate trade deals, however Canada has currently shown no interest in this.
Regardless of the outcome, there are no winners in a trade war. Price rise, tensions grow and uncertainty reigns. As it stands currently, the July 1 tariffs will mark a dramatic difference in Canada US trade relations. Contact Orbit Brokers with any questions or for any info relating to the new tariffs on US goods.