By signing the United States-Mexico-Canada Agreement (USMCA) in 2018, the ability of Canada to negotiate a trade deal with China or another “non-market economy” was greatly restricted. Current or future protectionist policies concerning trade with China or other countries will have a direct effect on Canada’s trade patterns. Under the USMCA, the U.S. will remain Canada’s biggest trade partner (75.4% of total Canadian exports in 2023), especially in the automotive and energy sectors. One other result has been that the U.S. bought more goods from Mexico than China in 2023 for the first time in 20 years, evidence of how much global trade patterns have shifted. The U.S. under President Trump and now under President Biden has become the most bilateral-trade-focused government in its history. Like the U.S., Canada is also looking to conclude deals with the EU, Japan, South Korea, the U.K. and India and other democracies eager to share in the benefits of bilateral trade agreements. For example, as a result in December 2023, Korean exports to the U.S. surpassed Korean exports to China for the first time in 20 years, driven by shipments of vehicles, electric batteries and other parts.
However, in an apparent effort to protect strategic American industries, President Biden’s recent announcement regarding a sharp increase in tariffs on an array of Chinese imports — including electric vehicles, solar cells, semiconductors and advanced batteries — will have an impact on Canada as well. Initially, the President had pledged to repeal at least some of Trump’s tariffs imposed on China. However, the upcoming election in 2024 changed all that. Mr. Biden’s moves, to be phased in over the next three years, now represent the latest trade-war escalation suggesting that the Democrats refuse to cede any ground to their rivals via a tough-on-China appeal to swing voters in the industrial Midwest and beyond. Politics appears to be overriding economic considerations once again.
Multinationals operating in both the U.S. and Canada are affected by the array of tariffs imposed on Chinese imports, especially when it comes to the need for parts, pharmaceutical ingredients, or rare earth elements essential for many high-tech devices. However, not everyone in the business community is happy with the most recent tariff increases on these imports. The National Retail Federation in the U.S., which represents many companies that source or sell Chinese products, called on Mr. Biden to reverse course and lift tariffs. As consumers continue to battle inflation, the Federation argues that the last thing the administration should be doing is placing additional taxes on imported products that will be paid by U.S. importers and eventually American consumers. Although the USMCA eliminated tariffs on all Canadian-purchased goods manufactured in the U.S., if a product includes components that were made outside of the U.S. — like China, for example — then the Canadian customer very likely has to pay tariffs on those components. The same argument can therefore be made with respect to the impact on Canadian consumers and on the inflation rates in both countries.
Mr. Trump has apparently promised to go even further if he wins in November — restricting investment between the two countries and banning some Chinese products from the U.S. entirely. Back in 2018, with President Trump’s plan to impose tariffs on up to $60 billion (U.S.) of Chinese imports, experts noted that a full-fledged trade war between the world’s two economic superpowers would damage Canada’s economy. At the time, the Retail Council of Canada declared that such U.S. tariffs that would raise the prices of Chinese consumer goods, such as electronics, sold in the U.S. and while prompting more Canadians to shop at home. However, such a situation today would very likely lead to a further inflationary increase at a time of already high inflation.
Economists have long argued that trade protectionism leads to a misappropriation of global goods and inefficiencies by interfering with the normal benefits offered by free trade. Cheaper Chinese imports to the U.S. and Canada led to many more affordable consumer goods which otherwise would not have been available in both countries, while also raising average standards of living in China. In addition, bilateral trade agreements can be broken at any time by either party to an agreement, unaffected by normal global market considerations and swings in trade patterns.
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