Trade war

  By Guest Blogger Ryan Lewenza

How the heck did we end up here? The almighty and powerful President Trump doubled down on his vitriol and contempt for Prime Minister Trudeau (and ostensibly now us Canadians), pledging to punish the “people of Canada” for Trudeau’s comments in a G7 wrap up conference. Quoting Trump, “That’s going to cost a lot of money for the people of Canada. He learned you can’t do that.”

Think about that for a second. Trump is willing to blow up critical and enduring relationships with key allies (an ally whose soldiers fought and died on the beaches of Normandy and in the hills of Afghanistan alongside US soldiers), cause untold damage to our economy and workers, and potentially harm the US economy as an escalating trade war will likely lead to higher inflation and slower economic growth for the US. And for what exactly? Trudeau reiterated the same talking points at the G7 conference that he said a week earlier to US media outlets.

It’s becoming increasingly clear and concerning that Trump makes major policy decisions based on knee-jerk and emotional reactions, especially if he feels slighted in any way. Basically facts and long-standing norms are secondary to his gut feelings. While this may have a place in finance and business transactions, I’m less convinced this approach will yield great success in politics and world affairs. So today I examine the facts behind the US/Canada trade relationship and try to poke holes in Trump’s position that a trade war with Canada is just and appropriate.

Trump likes to say (over and over again) that Canada takes advantage of the US through a large trade deficit with the US. What do the facts point to?

According to the US Census Bureau, the US had a US$17 billion deficit with Canada in 2017, but this only considers merchandise trade and excludes services. With our economies transitioning to a more service-based economy, shouldn’t we also include them in the calculations? When we include services the US deficit with Canada actually turns into a surplus. According to the Office of the U.S. Trade Representative (the government agency overseeing US trade policy), the US actually had a surplus of US$8 billion in 2017, when including services.

Admittedly there are different estimates and methodologies of calculating US/Canada trade (e.g., how re-exported goods from other countries are calculated), but the key point is that when considering goods and services, trade is essentially balanced, and in fact was in the US’s favour in 2017.

US Merchandise Trade Deficit with Canada

Source: Bloomberg, Turner Investments

I’ve always liked the expression “If all you have is a hammer everything looks like a nail”, and I think this is entirely appropriate with Trump’s approach to dealing with US trade deficits. He appears to paint each country with the same brush, being indiscriminate with his ire over US trade deficits. For example, the US merchandise trade deficit with China was US$375 billion last year, which as a percentage of total trade equated to 59%. For Mexico and Japan the US trade deficit was US$71 and US$69 billion, respectively, which represented 13% and 34% of total trade, respectively. Compare that to Canada where the US trade deficit was US$17 billion representing just 3% of total trade.

Putting aside our extensive relations with the US (e.g., similar values, history, highly interconnected economies, and shared border), purely from a factual trade relationship, why are Trump and his aides going so hard at us when we have the second highest trade with the US among its top trading partners and which is essentially balanced? Seems like we should be getting a better deal than China and others, no?

US Trade With Top 5 Trading Partners

Source: US Census, Turner Investments

Finally, Trump loves to claim that trade is not “fair” with Canada and points to our dairy industry and supply management system as an example of this. As Garth recently stated, this is a complete red herring on a number of fronts. First, the dairy industry in Canada accounts for $20 billion annually, less than 1% of our overall GDP and currently represents 0.2% of US goods exported to Canada. For argument’s sake let’s say that Canada opens up our dairy industry to the US and they grab 20% of market share in Canada equating to $4 billion of annual dairy sales. As a percentage of overall US/Canada trade (US$582 billion), this would equate to just 0.7% of total trade between the two countries.

Second, the US imposes quotas and tariffs on important US industries like the US sugar industry. The US is one of the largest consumers of sugar with the industry enjoying trade protection policies since as far back to 1789. Through the US farm bill, which provides US$20 billion annually in subsidies to US farmers, they put a strict quota on foreign sugar imports. The point being, we’re being made out to be evil villains through our supply management system when the US protects certain industries as well.

Finally, our high tariffs on dairy imports do not tell the whole story. According to the World Bank, the average tariff charged by Canada is 0.8% versus the US at 1.6%, as captured in the table below. So I believe Trump is emphasizing the dairy industry to help support his narrative and policies, but the overall numbers show otherwise.

Average Tariff Rates Charged by G7 Nations

Source: The World Bank, Turner Investments

Whether you love or hate Trump I think it’s fair to say that he plays fast and loose with the truth and facts. According to Washington Post’s Fact Checker analysis, Trump has made 3,251 false or misleading claims since becoming President.

As I’ve outlined in this blog the facts point to a fairly balanced trade relationship between Canada and the US, so I’m completely baffled by Trump’s approach and recent decision to levy tariffs on our steel and aluminum industry. Now he’s threatening to enact new tariffs on Canadian autos and parts, which would be devastating to our economy and workers. Is this how you treat long standing friends and allies? Begs the question, with friends like this, who needs enemies?

Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.