The Canada-U.S. Trade War: No End in Sight
I'm not totally sure what triggered the recent escalation in trade conflict between Canada and the U.S. As of June, things seemed to be muddling along well enough, with a focus on whether the USMCA would be renewed for another term and what that might look like for Canada-U.S. trade. The "51st state" talk had died down a bit at that point, which was good. When the USMCA joint review came and went on July 1 without renewal, that was mostly expected, and I didn't have the sense of an impending blowup in the relationship.
Then some Canadian wildfire smoke blew down to the U.S., and in a social media post on July 17 Trump put forward a vague tariff threat in response. But there are plenty of tariff threats these days, and it didn't necessarily seem like this one was going anywhere.
A few days later, though, on July 20, the Trump administration announced the imposition of tariffs under Section 338 based on accusations that Canada was discriminating against U.S. products in various ways. As the first ever use of Section 338 to impose tariffs, I think it's fair to say that this came as a bit of a surprise. Sure, people had mentioned Section 338 as a possible avenue for tariffs all the way back in 2016, but it hadn't been used to date, so why would it be now? Did the somewhat offhand wildfire tariff threats pave the way for a new tariff action that otherwise would not have happened? Did trade officials feel like that threat needed to have some sort of follow through? Who knows! Maybe the insider details will come out at some point.
Regardless of exactly how we got there, the Section 338 tariffs led to Canada-U.S. relations spiraling downwards. Canada announced its retaliation on August 25, and these tariffs went into effect today. In terms of possible U.S. escalation, all we have as of this writing is a threat by Trump to ban the sale of Bombardier jets. We'll see if anything else emerges in the coming days. [UPDATE: Action to remove Canadian-origin products from GSA procurement was just announced by Trump.][UPDATE II: Here comes more retaliation: Excluding Certain Canadian Products from Importation into the United States in Response to Continued Discrimination Against the Commerce of the United States with Respect to Dairy; Excluding Certain Canadian Products from Importation into the United States in Response to Continued Discrimination Against the Commerce of the United States with Respect to Motor Vehicles; Excluding Certain Canadian Alcoholic Beverages from Importation into the United States in Response to Continued Discrimination Against the Commerce of the United States with Respect to Alcoholic Beverages; there was also this: Modifying the Scope of Products of Canada Subject to the Additional Duties Imposed to Offset Canadian Discrimination Against the United States with Respect to Motor Vehicles; Modifying the Scope of Products of Canada Subject to the Additional Duties Imposed to Offset Canadian Discrimination Against the Commerce of the United States with Respect to Alcoholic Beverages]
I'm not sure what the Trump administration expected in response to the Section 338 tariffs. Administration officials often make reference to the fact that most U.S. allies eventually agreed to deals in the face of U.S. tariffs, whereas only China and Canada retaliated. It's possible these officials see trade leverage as the key here. Thus, in their view, the use of trade leverage pushed other allies into signing deals, and Canada should/would follow the same path with enough of this trade leverage in place. Section 338 would ratchet things up and get the deal done.
In my view, though, it's a mistake to see trade leverage as the key here. Arguably, it was security leverage that made the other deals happen. Everyone's situation is a little different, but, to take a couple examples, many EU nations feel dependent on the U.S. in the face of security threats from Russia, as do Japan and South Korea based on threats from China and North Korea. It was this security dependency that made these deals possible.
Importantly, Canada is in a very different position from most U.S. allies in relation to security, as it doesn't face the same security threats. I occasionally hear vague suggestions that Canada is under threat from China or Russia, but in a world where China or Russia are bombing/attacking/invading Canada, so much else has gone wrong that this is the least of anyone's worries. Canada simply does not face security threats in the way that other U.S. allies do. And the practical impact of this difference is that the U.S. doesn't have the same leverage over Canada as it does over other allies.
And then on top of that, while nobody's domestic politics are positive in relation to being publicly pushed around by the U.S., Canadian politics are particularly sensitive to this, especially in light of the rhetoric coming from President Trump and others in the administration.
So what happens now? My sense is that when they were at the negotiating table, Canada and the U.S. were not actually that far apart on the substance. A few tweaks here and there could be enough to close the gaps. However, the politics of all this could get in the way of a deal. The rhetoric has gotten heated and it can be hard to walk things back.
In the short term, this situation probably helps the Liberals in Canada politically, which makes a deal less attractive to the leadership there. In the U.S., it could hurt the Republicans slightly in the upcoming midterms, but this may not register enough for the administration to care (and Trump likes tariffs and trade wars, so he is not likely to back down in response to a small amount of political uncertainty).
Summing all this up: It's quite a mess we are in, and I'm not sure whether and how the key actors can get us out of it. While there's always a way for each side to make small concessions, declare victory, and get out, I don't know when people will feel the economic or political incentive to do so.