World's free trading nations could rally against Trump protectionism: Don Pittis

The new anti-free-trade administration of Donald Trump hasn't even taken over the White House and it appears incoming secretary of commerce Wilbur Ross is already preparing to send Canada a list of demands.

"NAFTA is logically the first thing for us to deal with," Ross said yesterday when asked about his trade warning. "We ought to solidify relationships in the best way we can in our own territory before we go off to other jurisdictions."

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Besides the neo-imperialist reference to Canada and Mexico as "our own territory," there is another reason to be wary.

It sounds as if the U.S. plan is a variation on the classic strategy of divide and conquer.

Only after sticking it to their "own territory" — in other words our territory — will the U.S. go on to make demands of more distant trade partners in Asia and Europe.

That might require Canada to step up and defend itself, including by looking for support from its free trading allies.

In his own response to the threat of new U.S. trade plans that could hit Canadian exports from cars to crude, Prime Minister Justin Trudeau sounded agreeable and willing to negotiate.

"I have said from the very beginning that I intend to have a constructive working relationship with the incoming American administration," Trudeau said in answer to media questions follow a town hall in Sherbrooke, Que.

In the nicety of trade diplomacy, being constructive and willing to listen must be Canada's proper opening gambit.

Hint of a harder line

However, while nodding to the importance of the U.S. market to Canadian businesses, Trudeau dropped a subtle hint that Canada could take a harder line.

"We concede the point that, yes, millions of good middle-class jobs in Canada depend on trade with the United States," said the prime minister. "But we highlight the fact there are millions of good middle-class jobs in the United States that very much depend on an open, strong trade relationship with Canada."

For a large majority of U.S. states, the biggest destination for their exports is Canada, said Trudeau.

His implied threat is a reminder trade sanctions don't just go one way. If the U.S. threatens to impose taxes on Canadian exports to the United States, it is inevitable that Canada must explore how it can impose a similarly damaging tax on exports from the U.S. to Canada.

As economists have repeatedly told us, tit for tat trade sanctions are bad for both countries that apply them. But without a countervailing sanction, protectionist countries simply suck jobs and wealth out of their trade partners.

Letting protectionist countries get away with it only encourages them to impose even more restrictive import barriers.

Retaliation inevitable

That is why countries around the world, even though most are not using the megaphone diplomacy favoured by the U.S. president-elect, are likely drawing up plans for how they can hit the United States where it hurts the most.

And it's not because they have anything against U.S. citizens. It's merely that in the world of trade sanctions, the only defence is an answer that exacts real pain on the country that imposes them first. 

According to Mathew Wilson, policy chief with the Canadian Manufacturers and Exporters, under the existing rules U.S. firms have nothing to complain about. 

"They actually have a slight trade advantage with Canada overall when you look at the overall trade numbers," Wilson told CBC News Network yesterday.

Because the two markets are so deeply integrated, taxing Canadian exports will make U.S. products more expensive, Wilson says.

In the short run, the United States would have an advantage as a protectionist trader. Despite growing inequality within the country, on average, its citizens represent a huge domestic market of consumers with money to spend.

Import substitution

One of the goals of protectionism is called "import substitution," where high duties redirect domestic manufacturers to source more of their inputs from domestic sources.

It may or may not work in the long run. But medium-term, disrupting existing supply lines will be expensive for everyone.

There are many ways that unilateral protectionism could hurt the U.S.

Though still a trade behemoth, the U.S. economy is no longer the only game in town.

It is only reasonable that the world's free traders, faced with a U.S. trade wall, would go out of their way to avoid U.S. tariffs by sourcing trade goods and inputs from anyplace but the United States. The danger for the U.S. is that it could create a kind of dynamic global free trade that excludes itself.

That would not be easy for Canada, with such a long common border with its southern neighbour.  

As Bank of Canada governor Stephen Poloz said yesterday, the effects of changes in "trade architecture" are complex and highly uncertain.

But it is not clear that Trump and his cabinet are doing the U.S. any favours by appearing to be protectionist trade bullies.

Follow Don on Twitter @don_pittis

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