'Shooting yourself in the foot': Why Canada has no good options on car tariffs

Major car manufacturing countries — Canada included — faced a grim reality as officials met in Geneva this week:

U.S. President Donald Trump's car tariffs (should he follow through and impose them) may be worse than anything they've dealt with so far, no matter what they do in response or retaliation.

No one's sure if the ceasefire brokered by the European Union — no further tariffs while new bilateral trade talks get underway — can hold, or if it even applies to countries outside the EU.

"The stakes are immense," said Debra Steger, a former Canadian trade negotiator who helped build the World Trade Organization before joining the University of Ottawa's law faculty.

The economic impact of car tariffs "absolutely dwarfs"  the steel and aluminum tariffs already affecting Canada's economy. "Let's not fool ourselves," she said.

The U.S. Department of Commerce started its "national security" investigation into the alleged risk posed by imported vehicles and car parts last May. Commerce Secretary Wilbur Ross said it could report back in August and recommend new tariffs to Trump within months — if the Americans aren't happy with how other countries are treating them at the bargaining table.

Canada needs to 'dig really deep'

Canada exports more cars, trucks and car parts to the United States than it imports. So if it wants to retaliate with equivalent dollar value tariffs the way it did steel and aluminum, it has to put other goods on its list of targeted imports from the U.S.

It was hard enough for Canada to settle on its first list, adding and dropping products after small and medium-sized companies warned they'd wind up as collateral damage if their costs jumped overnight.

A second list would need to be much longer. Putting it together would be far more difficult.

"Canada would need to dig really deep in its tariff schedule," Steger said.

Retaliation against a huge player like the U.S. isn't an effective strategy for smaller countries lacking the bargaining power of, say, the 500 million consumers in Europe's common market.

"It's like shooting yourself in the foot," Steger said.

Canada might need to look at taking retaliation to a new level by placing barriers on trade in services — like banking and insurance — restricting foreign investments or energy exports, or even denying the U.S. patent protection for intellectual property.

"Talk about a trade war — that would be a very provocative move," Steger said.

The automotive industry is too big and too economically important for Canada, Mexico, the EU, Japan and South Korea to simply accept its disruption on Trump's whim. Collective action speaks loudest — if everyone stays together in the tent.

"This is exactly why the meeting in Geneva is taking place this week," Steger said.

'No one is for it'

South Korea accepted import-restricting quotas from the Trump administration to dodge steel tariffs. Recent modifications to its bilateral trade deal with the U.S. placed quotas on Korean cars, too.

The EU's now in bilateral talks with the U.S. to avoid car tariffs. The Trump administration may use car tariffs as leverage in Mexico's NAFTA-related talks with the U.S. this week.

"They all have different levels of skin in the game," said Kristen Dziczek, vice-president for industry, labour and economics at the Center for Automotive Research.

The localization of production inside NAFTA's tariff-free zone — prompting, for example, German companies to assemble cars in Mexico, or Japanese companies to invest in Ontario facilities — means Mexico and Canada have the most to lose if they aren't exempted from the threatened tariffs.

But if things really are turning sour, Mexico has more options than Canada does, thanks to some aggressive trade deal-making around the world. Its foreign investment is growing and its non-NAFTA exports are expanding.

"They can start turning even more aggressively outward. Canada has a shrinking base," Dziczek said.

That doesn't mean American carmakers want Trump's tariffs, either.

"No one is for it," Dziczek said. The United Auto Workers, which stood alone offering positive feedback during the Department of Commerce's hearings earlier this month, sees potential employment gains but is not wholly on board.

Recent analysis from Dziczek's shop suggests even the best-case scenarios for American assembly plants result in a net loss of thousands of jobs across the industry — because parts manufacturing and supply chains generally are heavily integrated north-south.

Dealerships also take a hit when cars become more expensive and consumers think twice about buying new.

Even Trump's advisers don't agree on how to proceed. In dollar values, the U.S. imports six times as many automobiles and parts as it does steel and aluminum. This decision is "way bigger," Dziczek said.

What's a good deal?

Washington's paying attention to how other countries are preparing to hedge their bets, and to how the markets are reacting, said Rachel Ziemba, an adjunct fellow who focuses on trade and coercive policies for the Center for New American Security in Washington.

There's a "political calculus" at work as U.S. midterm elections approach, she said. "If anything, co-ordination of major U.S. trading partners has only upped the ante of senators to look to frame and re-shape and challenge some of the administration's authority."

But it's also "increased the incentive" for those advocating get-tough trade policies in American politics. Trump supporters remain skeptical of the merits of trade, after all.

"The president never likes it when he thinks that people are ganging up on him," Ziemba said.

"It remains to be seen," she said, "what the Trump administration and President Trump himself would see as a good deal on the auto side," particularly after the apparent de-escalation of his threat following his meeting with European Commission President Jean-Claude Juncker last week.

Think globally or save yourself?

Import tariffs affect entire supply chains, not just the specific goods taxed. Many countries, including those in the developing world, fear the dumping of cheap, displaced goods once import tariffs alter purchasing decisions.

It's all complicated by Trump's preference for one-on-one negotiations over collective action. The U.S. administration has panned a broader negotiation on auto tariffs, for example, to focus on a better automotive deal in NAFTA.

"For every country there's a balancing act between trying to change and support the global rules and just focusing on their national interest," Ziemba said.

The common good may conflict with a country's desire to avoid crippling costs, particularly on the short-term horizons politicians worry about.

The U.S. is using "national security" investigations to act unilaterally and dodge how the World Trade Organization restricts its trade policy.

"It's very tempting for Europe and Canada and China to say, 'We can go unilateral too,' but then that destroys the system," said Joel Trachtman, an international trade law professor at the Fletcher School at Tufts University.

As Juncker was reported to have told Trump last week, "We can also do stupid."

Trachtman examined how the European Union, Canada and Mexico retaliated after steel tariffs were implemented and their legal justifications. He said he isn't sure their arguments will hold up.

"It's not politically or maybe even systemically satisfying, but the proper legal response is to bring an action" to the WTO for arbitration, he said. After winning that case, those countries could then retaliate legally.

'Strategic patience'

WTO processes are slow, and getting slower, thanks in part to a lack of co-operation from the U.S. What about the economic damage in the meantime?

For years, there was an "informal trust" among WTO members that led them to avoid using bogus national security arguments to protect struggling industries, Trachtman said.

Now this "informal glue has rotted away," ramping up pressure to reform the WTO, he said.

Believe it or not, the U.S.'s national security tariffs may be WTO-compliant — while Canada's retaliatory tariffs may not be. The WTO gives wide latitude to countries when it comes to how they define their national security requirements — while it tends to frown on nations deploying retaliatory tariffs without bringing an action before the WTO first.

Instead of more retaliatory tariffs, Trachtman advises "strategic patience" until America sees reason.

"If the other guy drops rocks in their harbour so you can't export to them, it still doesn't make sense for you to drop rocks in your harbour," he said. The economic pain caused by retaliation might be worse than the pain from tariffs alone, he said.

"It would probably make sense to just not retaliate at this moment, as bitter as it may then feel, but it would be a high-road thing to do."

Despite the pressure from domestic political to stand strong against a bully, "you need somebody to say, 'We're doing adult trade' or, 'We're doing rational trade.'"

All well and good, said Steger, who helped build the WTO's appeal system and admits to feeling some emotional investment in it. But "tough cases are tough cases."

"Lawyers can stand on principle, but Rome is burning," she said. "Governments have to act out of the economic and political realities."