Withstand the trade war by trading more

Canada and the United States are in a trade war. The ongoing drama of NAFTA negotiations, and the possibility that the current trade arrangements, may not continue raises an important question. What is the Trudeau government’s Plan B?

President Trump’s tariffs on our products and the possibility of further tariffs on our auto sector could easily tip the Canadian economy into a recession. However, is a program of retaliatory tariffs the best policy response to U.S. action?

For political effect, many would argue that Canada needs to respond to destructive American trade policy, but it remains that raising tariff walls will hurt us more than the Americans. The U.S.—relative to Canada—is a more closed economy as its export-to-GDP ratio is approximately 10 per cent. While Canada’s export-to-GDP ratio is 30 per cent, and of that, 75 per cent of our exports go to the U.S. Again, tariffs and trade wars will hurt our economy substantially more.

Of course, this has not stopped pundits and columnists from calling for a return to tariffs and protectionist measures in response to short-sighted American trade policy. One columnist at the Toronto Star even urged a return to a “National Policy” for the post-NAFTA era. The reference, of course, is actually to the National Policy tariffs, which were part of a trifecta of policies implemented by the government of John A. MacDonald that included land settlement and railway building.

The National Policy tariffs came into effect in 1879 and involved a major increase from existing tariff levels, with the highest rate of 30 per cent on finished consumer goods and a 25 per cent rate on manufactured equipment. These tariffs formed the basis of Canadian commercial policy until the Second World War, which was followed by a policy of tariff reduction and increased trade with the U.S. that culminated in the 1965 Auto Pact, the Free Trade Agreement of 1988 and NAFTA in 1994. While the National Policy is seen as fostering manufacturing development in Canada, it also came at a welfare cost to Canadian consumers via higher prices and reduced consumption estimated at 4 per cent to 10 per cent of GNP.

As an official “Plan B” today, a new set of National Policy tariffs is not the way to go. In 1879, Canada still had a largely agricultural economy, and tariffs as an industrial development strategy was the norm among most countries. Moreover, the export-to-GDP ratio was below 20 per cent and our main trade partner was the United Kingdom and not the U.S.

Today, Canada is a developed economy highly dependent on a large and integrated trade relationship with the U.S. from which our standard of living has benefitted immensely. For example, in 1879 we did not obtain much of our fresh food produce and entertainment services from the U.S. If the Americans are interested in building tariff walls, then we should construct new trade relationships to replace the ones that are being torn asunder.

While we should not give up on NAFTA, if we have a Plan B, it must involve constructing new free trade arrangements for our products with as many other countries as possible. The seeds for this are already in place with the European Comprehensive Economic and Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, but we need to do more. In the face of U.S. tariffs, we should engage in more trade with the rest of the world and not retreat behind tariff walls and wait for the Americans to come to their senses.

We are a small open economy and we benefit from more—not less—trade. And from more diversified trade partners. We have not done as much on this front because since 1988 we’ve enjoyed enhanced access to the U.S. market, which being just across the border and sharing a common culture, has been relatively easy to access. It’s time to roll up our sleeves and go out to the rest of the world if we are to avoid the national pay cut reduced trade will bring.