What trade wars mean for business

North America’s changeable political climate could have ramifications for the economy and our financial system. In this Q&A, Conference for Audit Committees keynote speaker Laura Dawson shares insights on Canada-U.S. relations, NAFTA negotiations and more.

As Canadians and as CPAs, it can be challenging to keep up with the 24-hour news cycle, including how differently the Trudeau and Trump administrations approach diplomacy, public policy and risk management.

CPA Canada spoke to Laura Dawson, Director of the Canada Institute at the Wilson Center and keynote speaker at the 2018 Conference for Audit Committees. She shared her thoughts on Canada-U.S. relations, the threat of higher trade tariffs from NAFTA negotiations, and what the latest outcomes could mean for Canadian business, trade and the economy.

 

Laura, you work for a prominent think-tank in Washington, D.C., just a few steps from the White House. What first sparked your interest in the United States?

When I was growing up in the 1970s and 1980s, Americans and American-ness were part of daily life for Canadians. As the nightly news flickered on the black-and-white TV screen, I did not see the difference between Pierre Trudeau suspending civil rights to quell separatist terrorism in Quebec and the killing of student protestors at Kent State by the National Guard.

Expo ‘67 brought the world to Montreal, and in 1969, Apollo 11 took men to the moon. These are the threads that fed into the identity for many Canadians of my generation – an identity that is more North American than strictly Canadian. Then September 11 happened. Even though the attacks occurred on U.S. territory, the shockwaves reverberated across our two nations, and Canadians searched for ways to support our neighbors and friends during that terrible time.

 

In your opinion, what best characterizes the Canada-U.S. trade relationship? How were trade issues dealt with in the past versus now?

The economic relationship between the U.S. and Canada is the largest between any two nations in the world. Trade across the border amounted to about $675 billion last year. It is not surprising, then, that trade has been a major battlefield in the era of “America First” protectionist policies.

Any trade relationship with the size and complexity of the Canada-U.S. relationship will hit some bumps. Before “America First”, Canada made routine complaints about irritants that we really didn’t expect to change, because we recognized that these occupied areas of political sensitivity in the other country. It is worth recalling that the purpose of  agreements under NAFTA and the WTO – like many other institutions of the liberal international order – is to provide a rules-based, transparent system that helps to minimize the influence of short-term political interests on long-term market efficiency and collective prosperity.

But under the current administration, routine irritants are no longer dealt with routinely. Attacks lobbed by the White House at Canada and other allies have escalated from accusations of unfair trading to the imposition of punitive tariffs and threats to rip up key trade agreements. The White House is dismissing rules-based frameworks for settling disputes.

 

How has President Donald Trump been able to pass the tariffs through Congress?

What crossed the line for many Canadians was the grounds upon which Trump imposed tariffs on Canadian steel and aluminum this spring, citing “national security concerns.”

Previously, when the tariffs had been threatened but not levied, the president tweeted that they were simply a means to gain leverage at the NAFTA negotiating table. Congress-watchers remind us that by using national security as a justification, the president can impose tariffs much more broadly than he could otherwise, and without lawmakers’ approval.

Yes, Canadians understand that the president’s intention is political optics – but we are offended at a visceral level that our American allies have announced to the world that Canada is not to be trusted.

 

What exactly are we fighting over with our American neighbours?

In short, both Canadians and Americans are suffering because of retaliatory tariffs that make no economic sense. The cost of retaliatory tariffs is born by American manufacturers and exporters who become less competitive in other markets.

For example, the U.S. has a steel trade surplus with Canada. We are the largest exporter of steel to the United States, but we are also the largest importer of U.S. steel because the North American market has organized itself into regional pockets of specialization. Canada produces more flat-rolled steel products while the U.S. produces more pipes, tubes and other long products.

NAFTA made it possible for products like this to move easily across the continent as if the border didn’t exist. But now, by some estimates, for every American job in steel and aluminum processing that the tariffs protect, another 80 American manufacturing jobs are threatened.

 

What effects are we seeing on the U.S. and Canadian economies as a result of new tariffs?

A sizable share of U.S. exports to Canada and Mexico are now subject to tariffs imposed in retaliation. Add to that a rapidly escalating set of tariffs and countermeasures between China and the U.S. over intellectual property and technology disputes, and a substantial part of U.S. trade is at risk. Also, the cost of tariffs is not shared equally across the economy. They will hardly be felt by industries in some sectors but will wipe out profits in others, such as agriculture.

The combination of U.S. tariffs hurts its intended targets as well. Canada and Mexico are not only facing down billions in tariffs for their largest export market, they are also struggling with declines in investment as enterprises put new spending on ice while waiting for stability to return to the North American market.

The Bank of Canada forecasts a drop of at least two percent in business investment and a one-percent drop in exports by 2020 as a result of trade uncertainty, and that was before the “national security” round of the trade war began.

CPAs have an important role to play in helping their clients and organizations successfully navigate trade policy issues.

 

Learn more about the business impact of Canada-U.S. relations and NAFTA from Laura Dawson at the Conference for Audit Committees from December 6-7, 2018 in Toronto. You’ll also have the opportunity to explore other top issues facing the future of audit and assurance and earn up to 21 CPD hours.