FROLITICKS

When Canada, the U.S. and Mexico signed the U.S.-Mexico-Canada Agreement, known as USMCA, which came into force on July 1, 2020, no one really believed that any trade squabbles between the three countries would disappear overnight.  However, as a major trading nation, Canada has every desire to keep such squabbles to a minimum.  After all, the U.S. is Canada’s biggest trading partner with over 75 percent of Canada’s merchandise exports going to the U.S.  The U.S. and Canada enjoy the world’s most lucrative and enduring trade relationship, with almost $1.6 billion in goods crossing the border each day.  Goods and services trade between the two countries totalled almost $675 billion during 2017, according to the Office of the U.S. Trade Representative.

Despite our close economic relationship, disputes occurred under the former North American Free Trade Agreement (NAFTA) and continue to surface under the USMCA.  For example, the Canada–United States softwood lumber dispute is one of the most significant and enduring trade disputes in modern history.  The dispute has had its biggest effect on British Columbia, the major Canadian exporter of softwood lumber to the U.S.  In turn, it has increased the cost of softwood lumber in the U.S., influencing daily costs in housing construction.  More recently, the U.S. won a key ruling by the USMCA dispute-settlement panel that could allow more American dairy brands to break into the Canadian retail market, much to the chagrin of highly dairy provinces such as Quebec.  The next dispute on the horizon has Canada joining Mexico in formally disputing how the U.S. interprets rules governing the origin of vehicle parts under the USMCA agreement between the countries.  Ever since the auto pact under NAFTA, the three countries have established highly integrative parts and assembly capabilities when it comes to the manufacture of vehicles.  Now with the increased manufacturing of electric vehicles, the Biden administration has proposed that e-vehicles should be primarily assembled in the U.S., using American parts, in order to avoid any kind of tariffs at the American border.

In addition, all three countries are tied together in the energy sector on a truly continental basis.  Both Canada and Mexico have substantial oil and gas sectors, and help supply the thirsty U.S. markets.  None is so dependent as to ignore the other contributors.  Canada for some time now has been trying to increase the flow of Alberta oil via pipelines, such as the now defunct Keystone XL pipeline.  The Keystone XL pipeline project aimed to carry oil from the tar sands of Canada into the U.S. and has been a political football for years.  Led by pressure from American and Canadian environmentalists, both countries will continue to have issues surrounding the extraction and transport of fossil fuels, in particular via pipelines between the two countries.

However, trade wars simply are not effective.  Tariffs result in less capital spending and higher costs.  Any economics student knows that that is a recipe for net job losses across an economy, not net job additions.  For example, trade wars involving the introduction of tariffs result in more paperwork, less efficiency and higher costs as affected companies try to ‘game’ the system and attempt to get around the tariffs in any way possible.  The negative effects were clearly shown when Donald Trump introduced steel tariffs on Canadian steel.  A Canadian committee was quickly set up to make sure that other countries did not ‘dump’ steel into Canada in reaction to the U.S. steel tariffs.  Few new jobs were created in the U.S. steel industry, where the real issue is the problem of competition from modern and more efficient steel production overseas.  Again, Canada’s steel and aluminum industries are fairly integrated with American users and manufacturers, so that tariffs simply lead to market disruptions and increased end costs.

For decades now, people have talked about the need for freer trade between our two countries.  Indeed, most business people would prefer to let the marketplace determine the value of trade, including cost effectiveness and competitive advantages.  Unfortunately, it appears that administrations in both countries prefer to have dispute resolution processes settle their ongoing trade squabbles, often resulting in long, disruptive and costly legal battles.