Canada and the U.S. put tariff threats on ice, but expect more trade uncertainty amid COVID-19

In the end, the great tariff war of 2020 didn't last long. Just as Canada was about to announce its own round of tariffs on products made with American aluminum, the Americans announced Tuesday that a deal had been reached.

But the whole ordeal serves as a reminder of two key things: Tariffs may be dumb, but that doesn't mean they're going away any time soon.

Why are they dumb? Perhaps Canada's deputy prime minister put it best:

"The U.S. is taking the absurd decision to harm its own people at a time when its economy is suffering the deepest crisis since the Great Depression," Chrystia Freeland said after the U.S. imposed the latest tariffs in August that would have placed a 10 per cent levy on Canadian aluminum imports.

"Any American who buys a can of beer or a soda or a car or a bike will suffer."

So, the good news for people on both sides of the border is that Freeland was not in the end compelled to introduce her own tariffs, because they would have been just as harmful to Canadians.

Remember, a tariff is just a fancy word for a tax. And their efficacy has been debated for more than a century. Any Canadian tariffs on American imports would have forced Canadian consumers to pay more for products hit by the measure — just as the U.S. tariffs would have driven up the cost of everything from beer to cars by forcing American consumers to pay a tax on products made with Canadian aluminum.

"It really makes no sense whatsoever, if you think about it," trade lawyer Mark Warner said of the very notion of retaliatory tariffs.

Warner, principal of Toronto-based firm MAAW Law, said retaliatory tariffs make a certain amount of sense from a political standpoint. He said Canadians felt wronged by the U.S. measures against aluminum imports.

"It hurts our sense of ego and our sense of fair play," he said. "So we retaliate by putting tariffs on American exports to us, so Canadians pay for it."

Americans got what they wanted

In the end, Warner said, the Americans seem to have accomplished what they really wanted — which is a limit on the amount of aluminum Canadian producers can ship into the U.S. as part of the deal.

"It's face saving on both sides," he said. "The Americans get a quota, the Canadians get the tariffs dropped. But remember the Americans wanted the quota to begin with."

But even if the tit-for-tat measures are no longer in play, some economists feel the distortion from the threat of tariffs will be felt for a long time to come.

"This volatility, this is here to stay," said Frances Donald, managing director and chief economist with Manulife Investment Management.

Donald said that for much of modern economic history, much of the West has operated under the assumption that globalization and free trade benefit everyone. But as globalization took root and brought down the cost of many products, she said, it also saw the hollowing out of factory towns and the rise of income inequality and racial disparities.

She said de-globalization forces have been in play since 2015 — with populist sentiment against free trade, Donald Trump's election as U.S. president and Brexit in the United Kingdom all examples of growing opposition to the orthodoxy of free trade.

Then, just as it did to everything else, COVID-19 changed the economic landscape starting in March.

"COVID-19 has been a second de-globalization shock," Donald said. "Because even if we wanted to do business with the rest of the world, our borders have been shut."

She said it would make sense for businesses first hit by tariffs and then by closed borders to think about sourcing goods or labour domestically.

"Even if it costs more in the short run, it's almost like an insurance policy against disruptions in the future," Donald said.

Ideas like that help to explain why the conversation around globalization has changed.

"We are in the middle of a paradigm shift away from a massive economic theme that defined the last several decades and moving into a new environment," she said.

The end of globalization?

Donald said globalization won't go away. Many aspects of it are permanent fixtures, including the digitization of the economy and the ability to buy products around the world and have them shipped to our doorsteps.

But she said consumers and businesses are currently looking around and wondering what sort of world will emerge from the COVID-19 pandemic. The most common themes revolve around more local support for products and services, she said.

The problems that businesses will soon face are ones they didn't have to think of until recently.

"Businesses are going to feel an increasing amount of barriers and uncertainty toward expanding their supply chain to other countries," Donald said.

And for that reason, she said, the tariff dispute between Canada and the United States is really just symbolic of something happening around the world on a much grander scale.

And it's a force that is expected to remain with us for many years to come.