Trade turmoil ahead for Canada amid Trump administration’s protectionist policies – CBOC

American President Donald Trump.

The common front at G7 Summit was important signal that Canada is in good company on what looks to be a difficult file

By Glen Hodgson, senior fellow, Conference Board of Canada

The full Trump economic agenda is becoming more evident with each passing day — to attract business investment back to the United States, restore American manufacturing to its glory days, and create well-paying jobs for his Middle America political base.

The most likely outcome is short-term gain for some in the U.S. economy, but longer-term pain and risk — for American consumers, businesses and trading partners.

Following a long recovery from the 2008 financial crisis, U.S. President Donald Trump has the benefit of a healthy U.S. economy today. Business confidence is rising, as are corporate profits, and private investment growth is solid if not spectacular. Short-term interest rates are also rising as the Federal Reserve aims to restore more normal monetary conditions.

Over all, the U.S. economy is projected to grow by up to 3 per cent in 2018. Consumers are feeling more buoyant. The unemployment rate is down to 3.8 per cent, and wages are starting to rise a bit more quickly. Housing prices have rebounded to the highs of a decade ago in many markets. There is some capacity for further labour force growth, as the U.S. employment rate is still below its high prior to the 2008 crisis.

The tax cuts passed in 2017 for businesses and individuals with high incomes were aimed at boosting investment and attracting capital back to the United States. So far, firms are reportedly using much of the added cash flow to buy back shares and boost share prices.

Moreover, the U.S. economy is transitioning toward high-value services and the digital economy, and away from traditional manufacturing. In this new world, it is debatable if the tax cuts will fuel a sustained boost to U.S. domestic investment in manufacturing.

And the tax cuts come at a significant cost; ongoing large fiscal deficits and mounting public debt that is projected to rise toward 100 per cent of GDP over the next decade. Future administrations will have the task of dealing with the consequences.

The economic benefits of the tax cuts are further limited by U.S. tariffs – one of the other central themes of the Trump agenda. Tariffs are a tax increase, neutralizing the business tax cuts in some sectors. They could lead to higher inflation and place further pressure on the Feds to raise short-term interest rates.

The Trump Administration’s trade rhetoric is highly protectionist, but its actions are fickle, unpredictable and scattered. Long-time allies and trade partners are targeted for aggressive tariff actions, while the tough trade talk toward China — which has a massive bilateral trade surplus with the United States — has not resulted in equally tough action.

The tariffs just introduced on aluminum and steel imports from Canada, Mexico and the European Union are small in the context of the overall U.S. economy. Nonetheless, they will negatively affect U.S. businesses and consumers, with little short-term economic benefit.

The specific imported steel and aluminum products hit by tariffs are used primarily as inputs in U.S. manufacturing processes. There is limited scope for immediate American substitutes — particularly for Canadian aluminum. U.S. exporters would be negatively affected by the countertariffs introduced by trade partners, particularly since substitutes appear to be readily available for many of the U.S. consumer goods and business inputs selected for countertariffs. With further tariff action threatened in the auto sector — ostensibly a bargaining chip in ongoing trade negotiations – the potential for escalation is rising.

Over the longer term, a pursuit of protectionist policies will impair U.S. and global growth potential. Consumers and businesses will face added costs and restricted choice. U.S. exporters will face more countervailing measures and barriers to foreign market access — ultimately making the U.S. economy less efficient and competitive.

How should Canadian policy makers respond? It’s time to do our homework on tax policy options for maintaining Canada’s tax competitiveness, focusing in particular on targeted initiatives aimed at boosting business investment spending in Canada.

Canada had little choice but to introduce its own tariffs to counter the Trump protectionist action on aluminum and steel. Yet a successful responsive trade strategy will require two other core actions.

First, continuing to work closely with affected parties and influencers in the United States — in sectors, states, communities and on Capitol Hill — to engage in a full discussion on the costs of protectionism, and the benefits of open trade to Americans. And second, deep engagement with other affected parties — specifically the EU, Japan and Mexico — on keeping the global trading system open.

The common front at the G7 Summit was an important signal that Canada is in good company on what looks to be a difficult file.

The Trump tax and trade agenda offers the mirage of limited short-term gain, but will impose significant long-term pain on America and its trading partners. Canada now has little choice but to prepare for a long period of turmoil.

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