Why a U.S-China trade war could be a 'net negative' for Canada

A trade war between the United States and China could potentially provide benefits to a handful of industries in Canada but the overall impact would be negative for the Canadian economy, some experts warn.

"Any Canadian businesses that are selling products that could be substituted for Chinese products that have the tariffs being applied could benefit from this," said Craig Alexander, senior vice-president and chief economist of the Conference Board of Canada.

"But overall it's going to be a net negative."

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China announced a $3-billion list of U.S. goods for possible retaliation after U.S. President Donald Trump outlined $60 billion US of tariffs on Chinese goods.

Specifics about which sectors will be targeted remain sparse. A detailed list of products is expected to be developed
in two weeks.

But the Chinese government said it was considering a tariff increase of 25 per cent on pork and aluminum scrap, mirroring Trump's 25 per cent charge on steel. A second list of goods, including wine, apples, ethanol and stainless steel pipe, would be charged 15 per cent, mirroring Trump's tariff hike on aluminum.

Potential opening

That could provide a potential opening in the Chinese markets for some Canadian exporting firms that could replace higher-priced American goods, particularly in agriculture.

"They go after American pork exports and Canadian pork exports to China might be expected to pick up some of the slack," said Robert Wolfe, professor emeritus for Queen's University's School of Policy Studies.  "So certainly the pork farmers stand to benefit."

"There may be some other commodity suppliers who might benefit if U.S. producers who export goods similar to ours get shut out of the Chinese market or face higher prices in the Chinese market," said Wolfe.

As well, if Chinese exports are kept out of the U.S. market, they will look for alternative markets, said Lynette Ong, an associate professor of political science at the University of Toronto's Munk School of Global Affairs.

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"Canada is likely to be a benefactor in this respect," she said. "We will see China intensifying its efforts to negotiate bilateral free trade deals with Canada and other countries."

Meanwhile, the Canadian steel industry may be able to gain market share in North America by taking advantage of the large tariffs being applied on Chinese steel, Alexander said. 

Canadian retailers could also see an uptick in business, as the trade dispute would cause the price of consumer goods to go up in the U.S. and curb cross-border shopping, said Joy Nott, president of the Canadian Importers and Exporters Association.

Weaken global economy

But from a larger macroeconomic perspective, Canada would likely suffer overall, say some experts.

"We're really affected by what's happening to global demand," Alexander said. "This is going to overall weaken the global economy."

If the dispute was to escalate, some of China's industries would be hurt by the tariffs, while U.S. consumers and businesses will suffer because of the higher cost of imported products, Alexander said.

"This is going to be negative for the U.S. economy, this is going to be negative for the Chinese economy."

A weakened Chinese economy would also lower commodity prices, Alexander said. Canada, as an exporter of those raw materials, could take a significant hit.

If the supply chains that link the U.S. and China and link Canada and the U.S. get disrupted, that won't be good for the firms that might be part of those chains, Wolfe said. And if the disruption leads to inflation in the U.S., or major industries start losing business, that too could have a negative impact on Canada.

Canada is so integrated in the U.S. supply chain, that whatever hurts the United States hurts Canada, said Nott.

"They are our biggest customer," she said. "Generally speaking, what's not good for the states is not good for Canada. And there's just no way that this is good for the U.S."

Not all Canadian industries, however, will necessarily pick up the slack.  For example, there are suggestions that China, the largest importer of U.S. soybeans, could target that industry.

Ron Davidson, executive director of Soy Canada, said the imposition of higher tariffs on Chinese imports of U.S. soybeans could result in increased volume and price of Canadian exports to China, but reduced volume and price of Canadian exports in other markets. 

Impact on NAFTA

"The severe backlog of rail shipments in western Canada would significantly limit the potential for Canadian farmers and exporters in Western Canada from taking advantage of new export opportunities," he said.

Canada is naturally occupied with its own trade issues with the U.S., primarily the continuing negotiations on NAFTA. And with Trump's attention now focused on China, is it possible the president may relent a bit on the agreement?

"Perhaps if his constituency gives him credit for standing up to China, it give us more leeway to negotiate a deal on NAFTA. Maybe," said Alexander.

"Reading the tea leaves in the current environment is extraordinarily difficult."

But Wolfe said NAFTA is on its own track and he doesn't believe Trump will take his eye off the deal just because of China.

"He's quite happy to have more than one disruption going on at a time."