Is a Global Trade War on the Horizon?

With U.S. tariffs on Canadian steel and aluminum now in effect, Nathan Janzen, Senior Economist with RBC Economics, delves into the potential consequences of the new import taxes and asks, "Are we in for a global trade war?"

In a report titled Weighing the impact of U.S. steel and aluminum tariffs on Canada, Janzen examines how the recent move by the Trump administration could affect businesses and consumers.

Taxing imports to the U.S.

On March 1, 2018, the Trump administration announced a 25 per cent tariff on incoming steel and a 10% tariff on incoming aluminum, but Canada and a number of other countries were exempt. However, that exemption has now been lifted and as of June 1, steel and aluminum from Canada, Mexico and the European Union (EU) are subject to the tariffs.

Janzen notes that while about 90 per cent of Canada's steel and aluminum go directly to the U.S., only about half of Canada's steel and three-quarters of aluminum exports will be impacted by the tariffs – amounting to roughly 3 per cent of our total exports.

Who will feel the hit?

While tariffs are often a tool to push back against a foreign country's exports, Janzen notes that much of the cost is "ultimately paid by domestic rather than foreign producers and consumers." This could mean higher prices for U.S. consumers and lower margins for U.S. manufacturers. For example, after the U.S. placed import tariffs on Canadian softwood lumber in 2017, U.S. prices "have spiked for all of those products."

As Janzen outlines in his report, the nature and consequences of these tariffs is further complicated by a number of issues, including:

• The integrated nature of U.S. and Canadian manufacturing. The production chain is often cross-border, meaning that Canadian prices could also rise as parts produced in the U.S. may be pricier due to higher raw material costs.
• Retaliatory tariffs from Canada, Mexico and the EU. These measures are typically designed to have "maximum political impact abroad" and "minimum impact on the domestic economy" – and they are currently in the works.
• General uncertainty for businesses. The rationale behind these tariffs is ambiguous. Tied to both North America Free Trade Agreement (NAFTA) negotiations and national security concerns, businesses are left wondering what industry might be next. When uncertainty reigns, it can be tough to make business decisions.

Canada's countermeasures unveiled

In response to the steel and aluminum tariffs, Canada announced plans to place tariffs on $16.6 billion of imports from the U.S. starting July 1. Those include some steel and aluminum products, plus a host of other possibilities such as maple syrup, strawberry jam, whiskies, dishwasher detergents, sleeping bags and more.

Is a trade war on the horizon?

After a three-day meeting of G7 finance ministers in Whistler, B.C., six of the seven issued a statement calling on the U.S. Secretary of the Treasury to communicate to President Trump their "unanimous concern and disappointment" over the U.S. trade actions.

As the anti-trade rhetoric out of the U.S. continues, Janzen notes that sabres are indeed rattling. His report, however, concludes that the data currently remains well below "global trade war" territory.

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