If you are Canadian, unless you have been living under a rock, you have most certainly heard that Canada and the United States are working to finalize a trade deal to lower tariffs and restore American booze to Canadian shelves, etc. We don’t have many details yet, but when the details do come out, here is what to look for when evaluating whether it is a good deal for Canada, even if there are still tariffs in play.
Canada vs The World
First, we must look at where it leaves Canada relative to the rest of the world. If tariffs are lower on Canada than Europe or Japan or South Korea, then that is good news. We will have an advantage selling our products into the U.S. over everybody else. The United States can’t make everything they need so if we are the cheapest imports that is good for Canada.
Canada vs The United States
This is the critical piece of the puzzle. One of Trump’s objectives is to encourage manufacturers to move factories to the United States. Specifically, this means steel, aluminum, auto and forest products. What is important here is that we are not at a huge disadvantage to the United States.
Let’s take the auto sector as an example here. Currently the U.S. imposes a 25% tariff on imported vehicles, however for Canada (and Mexico) this is reduced by the percentage of American content. This is bad for Canada because it puts Canada at a disadvantage relative to American manufactured autos. Canada has retaliated tariffing U.S. manufactured vehicles although there are offsets for manufacturers that also manufacture cars in Canada.
The rumours are that the new trade deal will drop this tariff rate to 15%, which could be further reduced by the percentage of American content in the vehicle. If this is the outcome and we had to drop our counter-tariffs this would be awful for the Canadian auto sector. We simply wouldn’t be able to compete. If Canada signals a willingness to accept a 15% tariff on Canadian manufactured autos and auto parts, then there is little reason for auto and auto part makers to move production to the United States. Under no circumstances should Canada agree to this.
However, there was a representative of the Canadian automakers interviewed on CBC today (my apologies, I don’t recall who it was) who didn’t know the details of what was being negotiated but suggested if the 15% only applied to non-CUSMA (i.e. not Canadian, American or Mexican) components then the result wouldn’t be so harmful to Canada’s auto sector. It would only hurt foreign component suppliers to the limited extent they are included in Canadian auto manufacturing. In fact, it could make manufacturing in Canada more appealing because selling Canadian manufactured products to Canadians assuming Canadian vehicles had no tariffs on foreign components, but American autos did.
So, a lot depends on the details, but a headline tariff rate of 15% may not put us at a disadvantage depending on the details of where it gets applied.
To Summarize…
What Canada’s objective in these negotiations should be is to have advantageous access to the U.S. market relative to the rest of the world while not being disadvantaged relative to the American manufacturers. If Trump wants to tax Americans and American businesses through tariffs that is a domestic issue. I think Canada getting preferential access to the American market over the rest of the world is almost a certainty. However, it is my opinion that Canada should not settle for any deal where we are not given a level playing field with American businesses similar to what the existing CUSMA deal provided us.
I’ll post my thoughts after we learn about the details of the agreement in a couple days, that is if the agreement gets finalized.