Trade war: Sifting through facts, fibs of U.S.-Canada tariff tiff

Article content

The truth appears to be one of the first casualties in the current tariff battle between Canada and the United States.

Article content

Article content

A tsunami of statistics, claims and massaged truths are flooding the debate, so let’s take a look at the information and claims most frequently made.

Trump says Canada one of world’s ‘highest tariffing countries’

False.

Virtually all the trade between the two nations is eligible to be tariff-free if it meets content-of-origin standards listed in the current Canada-U.S.-Mexico Agreement (CUSMA), says University of Calgary economics professor Trevor Tombe, author of ‘Partners in Prosperity,’ a study on Canada-U.S. trade.

Article content

In the auto industry, for example, 75 per cent of the parts that make up a vehicle must originate from the U.S., Canada or Mexico to qualify.

“Non-agricultural exports from the U.S. to Canada, 99.4 per cent are duty free and 97.2 per cent of agricultural exports,” Tombe told the Star.

“Nearly everything is duty-free with the exceptions being dairy, eggs and poultry products. The U.S. also has some exceptions to support their agriculture.

“They support their agriculture differently, through subsidies and direct payments, while we use supply management.”

However, Canada does have tariff rates on the books that can soar to over 200 per cent for dairy, eggs and poultry.

“Dairy and egg tariffs can be higher than 200 per cent under our supply management system if you go beyond quotas,” says Carleton University associate professor of economics Vivek Dehejia.

However, he adds: “That’s never happened.”

The World Bank data portal shows Canada’s current weighted tariff rate for all goods is 1.37 per cent while the U.S. rate is 1.49 per cent.

But for a brief spike in 2004, Canada’s weighted tariff rate has been below the U.S. since 1997.

Article content

Despite Trump’s claim that Canada has hiked tariffs since he agreed to CUSMA (referred to as USMCA in the U.S.) in 2018, the rates remained unchanged.

Is there actually a U.S. trade deficit with Canada?

Trump has stated repeatedly the U.S. trade deficit is US$200 billion, which he describes as an American ‘subsidy.’

The actual U.S. trade deficit with Canada, when all goods and services are included, was actually about $100 billion in 2023, says Tombe.

However, that deficit is wiped out when energy is removed from the equation. The U.S. is forced to purchase energy, either from Canada or somewhere else, because it cannot meet its own demands. And the Americans get Canadian energy at discounted rates.

“If you strip energy out, the U.S. actually runs a trade surplus that has been pretty stable and material over time,” Tombe says. “Over the past decade, that surplus, without energy, is US$2 billion to US$4 billion per month,” he adds, citing U.S. Census Bureau figures.

U.S. dairy access

Trump says the trade agreement he signed with Canada imposes exorbitant tariffs on U.S. dairy products. Those kick in after a CUSMA quota is hit — one that has yet to be reached.

Article content

Canada’s dairy supply management system has long drawn trade complaints about restricted access from countries other than the U.S., such as New Zealand.

However, the U.S. Department of Agriculture’s Foreign Agriculture Service data portal showed Americans exported US$1.1 billion worth of dairy products to Canada in 2024 — twice as much as Canada’s $550 million in exports that same year.

U.S. dairy exports were US$736 million in 2020, when CUSMA entered into force, and has grown by 50 per cent since then.

Reciprocal U.S. tariffs on Canada’s HST?

The U.S. has been studying its trading relationships around the globe and on April 2 will unveil its reciprocal tariffs plan to counter things it perceives as tariffs, such as value-added taxes, charged by other nations on American goods.

“If he (Trump) follows through on what he says, then the tariff will apply to items that are currently free of tariffs,” Tombe says.

“The fact that USMCA has agreed upon zero-rates appears not to matter to him. And the formal dispute resolution mechanisms are both slow and, I suspect, something he would later ignore anyway.”

Article content

Trump administration also considers Canada’s HST as a tariff, even though the sales tax is applied to all domestic and imported goods equally, says Tombe. Another annoyance to the U.S. is Canada’s new digital tax.

“He and others in his administration also point to value-added taxes as a source of unfairness that would be subject to the reciprocal tariffs,” Tombe says.

“That could potentially mean at least five per cent on everything, but potentially more depending on how they view the HST levied in place. It’s a mess with considerable uncertainty at the moment.”

Are U.S banks prevented from setting up in Canada?

No. There are 16 American banks currently operating in Canada.

U.S. banks have been allowed to incorporate subsidiaries in Canada under the same rules as domestic banks since the late 1980s under the first Canada-U.S. free trade agreement. American banks were the first foreign banks to have the restrictions on foreign bank ownership in Canada lifted.

U.S. banks operating in Canada currently hold $113 billion in assets in this country, accounting for half of all foreign bank assets in Canada, according to the Canadian Bankers Association.

Article content

Hurting your own people with tariffs

One of Trump’s main goals is to bring back as much manufacturing to the U.S. as possible.

That’s a hugely expensive and time-consuming project that will require many years of dedicated effort and would inflict significant pain on U.S. and Canadian consumers, economists and industry experts say.

Tombe’s study found only 21 per cent of Canada’s exports to the U.S. were final products, with the remainder being inputs of different levels into products being made in the U.S. Those Canadian inputs are threatened with a 25 per cent tariff.

Tombe’s report stated a 25 per cent tariff on the many cross-border inputs used by each country would raise prices and reduce productivity for both countries.

“A 25 per cent tariff is nowhere near high enough to do that,” said Tombe of untangling the integrated economy in North America.

“Trade wouldn’t cease. It would continue — there’d just be less of it for everyone.”

Repatriating manufacturing to the U.S. would be disruptive and it can’t happen overnight — but it is possible, says economist Dehejia. An initial big challenge would likely be finding the skilled workforce to fill the flood of such new jobs.

Article content

“He (Trump) said, ‘There’s going to be pain, but we’re prepared for that,’ so we should be worried that’s really his goal,” Dehejia said. “We have to be prepared for that.”

But given its scale and integration in North America, he adds the auto industry would present a particularly tough challenge for repatriation.

“I think the auto sector is a very special case because of that integration,” Dehejia said.

Beware high cost of hitting back with retaliatory tariffs

With the 2024 U.S. GDP of $29.35 trillion being nearly 15 times that of Canada’s ($2.12 trillion), Dehejia warns of the danger a scattergun approach to retaliatory tariffs can pose.

“Retaliatory tariffs may be good politics and feel patriotic, but it’s not great economically for Canadians,” he said.

“We’re going to end up paying higher prices when that 25 per cent tariff is passed along to consumers. We’re harming ourselves economically, though I understand the feelings we need to retaliate.”

Dehejia said tariffs must be carefully targeted with the boomerang effect on Canadians carefully calculated. He noted that boomerang effect also makes the Americans’ own tariffs on steel, aluminum and potentially the auto industry damaging to their economy.

Article content

“Let’s say we put on the full $155 billion worth of tariffs the government has drawn up,” Dehejia said. “That’s just a rounding error for the U.S. GDP.”

Using tariff powers designed to attack enemies

Trump is plying unchartered waters in the way he’s using presidential tariffing powers in the U.S. International Emergency Economic Powers Act (IEEPA).

“These are powers meant to be used only in actual conflicts,” Tombe said. “This act evolved from World War I’s Trading with the Enemies Act.

“These are powers not meant to be used in the normal course of economic relations. Trump is the first president to ever do that.”

U.S. President Jimmy Carter used the IEEPA in 1979 during the Iran hostage crisis against a foreign enemy. Trump previously used the tariff powers in 2017 on steel and aluminum.

“These are measures presidents typically use to enact sanctions or export/import restrictions for highly sensitive items for legit military and strategic value or to try and punish countries who are actually aggressors to U.S. interest abroad,” said Tombe.

Dwaddell@postmedia.com

Twitter.com/winstarwaddell

Article content