Canada’s furious, I get it. But by retaliating, we punish only ourselves

Fraser Johnson is the Leenders Supply Chain Management Association chair at the Ivey Business School at Western University in London, Ont.

Canadians are furious at U.S. President Donald Trump after the collapse of trade negotiations last Friday. The vast majority of Canadians and their provincial political leaders are demanding retaliation. I get it. Ottawa’s countertariff announcement on Tuesday is no surprise.

However, I believe this is poor strategy and remain steadfast in my opinion that imposing countertariffs is ineffective. They serve only to raise consumer prices, punish Canadian businesses and unnecessarily complicate trade negotiations.

On Tuesday, Ottawa announced plans to impose tariffs ranging from 15 to 50 per cent on roughly 700 items – about $27.6-billion worth of American goods. Among the products targeted by Canada are appliances, clothing, motorcycles, chainsaws, electronics and seafood. Tariffs on U.S. steel and aluminum will be doubled to 50 per cent.

Ottawa announces retaliatory tariffs on $27.6-billion of U.S. products

We have been here before. Early last year, Canada imposed three rounds of countertariffs on more than $90-billion worth of U.S. goods. In September, Ottawa withdrew approximately half of these tariffs as a gesture to help advance trade talks, leaving in place levies on U.S. steel, aluminum and automobiles.

This back-and-forth is likely going to continue its vicious cycle, creating greater economic uncertainty and driving up costs for Canadian businesses and consumers.

Above all else, Canadian businesses crave economic and political stability so that they can justify commitments for investments in capital equipment, new product and service development, hiring and expanding capacity. The current trade war contributes to investment hesitancy and reduced risk-taking.

During the past year, the Canadian economy has demonstrated resilience. The Ivey Purchasing Managers Index, a leading economic indicator, has strengthened, with a 12-month moving average of 53.4. (A reading above 50.0 indicates that the Canadian economy is generally expanding, while a reading below 50.0 generally indicates that it is contracting.)

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Similarly, the Canadian unemployment rate has declined to 6.4 per cent from 7.1 per cent last August. Even the carefully targeted new countertariffs proposed by Ottawa will stifle this momentum by creating economic headwinds and eroding consumer confidence.

There is a reason why Canada and Mexico are the U.S.’s largest trading partners. Supply chains rely on regional trade for several practical reasons. Unravelling integrated North American supply chains is neither realistic nor productive. Instead, Ottawa and Washington have an opportunity to reset their relationship and strengthen the North American industrial base.

Despite hefty tariffs, American businesses still rely heavily on Canadian energy, steel, lumber and aluminum. Products move back and forth across the border as they are transformed into finished goods, such as cars, equipment and machinery.

Canadians also need to be realistic about our relative bargaining power with the U.S., and the ability to exact concessions using countertariffs. The U.S. exported about US$330-billion to Canada last year, which represented 16 per cent of the nearly US$2.2-trillion in U.S. goods exports. By comparison, Canadian businesses sold US$383-billion of goods to the U.S., about 75 per cent of total exports. Canadian countertariffs will have a nominal effect on the US$27-trillion U.S. economy, while Canadian exporters rely heavily on the American market.

The escalating war of words, personal barbs and insults between our political leaders is not helping matters. Let’s not get taunted into a fight that we cannot win.

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Small- and medium-sized businesses, the backbone of the Canadian economy, are the most affected by the recurring cycle of tariffs and countertariffs. Their supply chains are concentrated among a small group of suppliers and customers, and they often lack the financial flexibility to deal with sudden shocks. The backstop of government support programs announced on Tuesday, no matter how carefully crafted, is not a long-term solution for small businesspeople who need economic stability and opportunities to grow their markets.

If Mr. Trump follows through on his latest threat, his 50-per-cent tariffs on Canadian automobiles, trucks and automotive parts could drive automakers to close factories in Canada. However, the timing gives negotiators four months to strike a deal. And there are incentives to get things worked out.

Mr. Trump’s tariffs have already cost automakers more than $35-billion and the threatened tariffs would be yet another pain point for automotive supply chains. Canada is the largest market for U.S.-made autos and trucks, and exports to Canada were down 22 per cent in the last year, representing $7-billion.

I am not advocating capitulation. I agree that no trade deal is better than committing to a bad deal. However, resolution of the current trade dispute and diversification efforts require patience and measured responses, with a long-term perspective. Meanwhile, Canada will continue to rely on our economic relationship with the U.S. There are no winners in trade wars, only losers.