President-elect Donald Trump has announced plans to impose 25 per cent tariffs on all products from Canada and Mexico, alleging both countries have failed to curb the inflow of illegal immigrants and drugs into the United States. This policy is set to take effect once Trump assumes office in January. Prime Minister Justin Trudeau is meeting with the premiers on Wednesday to discuss a response.
During Trump’s first term in office, we witnessed numerous similar instances of protectionist rhetoric and actions. These included labelling the North American Free Trade Agreement as “the worst trade deal ever made,” threatening to withdraw the U.S. from the World Trade Organization (WTO) and imposing steel and aluminium tariffs on Canada and other countries.
Canada and Mexico are two of America’s largest trading partners, and the tariffs could have significant economic consequences for all three nations.
Protectionist policies drive trade uncertainty
The negative rhetoric and unilateral trade policies during Trump’s first term proved detrimental to global trade. They significantly disrupted bilateral trade flows between the U.S. and one of its largest trading partners, Canada.
Trade openness — a key indicator of economic globalization measured as a ratio of trade to GDP — declined significantly during Trump’s presidency, comparable to global trade collapse caused during the 2008 financial crisis.
(World Development Indicators)
My previous research demonstrated that such adverse rhetoric not only heightened political tensions between the U.S. and its allies, but also significantly increased economic policy uncertainty within the U.S.
The economic policy uncertainty index measures the frequency of articles in American newspapers that discuss policy-related economic uncertainty and include references to trade policy. The index experienced a notable upward trajectory during Trump’s presidency after a long period of stability since 1995.
(Economic Policy Uncertainty)
This trend is unsurprising, given Trump’s persistent disparaging remarks about the global trading system and his continuous criticism of trade policies — even those involving close allies.
Trump’s tariffs could spark a trade war
If the president-elect follows through on his threat to impose a unilateral 25 per cent tariff on all imports, it would almost certainly trigger a tariff or trade war with the country’s major trading partners.
A trade war typically unfolds when countries retaliate against each other by progressively imposing trade restrictions. If the U.S. enacts tariffs unilaterally on imports, its trading partners are likely to respond with retaliatory tariffs on U.S. exports. Mexico has already announced plans to impose retaliatory tariffs on U.S. imports if Trump follows through with his threat.
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Trump’s proposed tariffs against Canada and Mexico may be illegal, but that’s not the real problem
While such a tariff war would undoubtedly harm its major trading partners, the U.S. itself would not emerge unscathed. As the world’s second largest exporter and largest importer, it’s a major beneficiary of the global trading system.
Although imposing tariffs might initially appear advantageous for the U.S. by protecting domestic producers through higher prices, this benefit comes at the expense of American consumers, who would face higher costs.
Moreover, retaliatory measures from other countries would erode any potential gains from such “beggar-thy-neighbour” policies, ultimately leaving the U.S. and the global economy worse off.
Agri-food trade and tariffs
The U.S. is the world’s largest exporter of agricultural products. According to the U.S. Department of Agriculture (USDA), agricultural exports generated US$197 billion in revenue in 2022 and support more than 1.25 million jobs annually.
Any trade war targeting agri-food products would have significant adverse effects on the U.S. agricultural sector, jeopardizing both revenue and employment. This risk is heightened by the fact that retaliatory tariffs often target agricultural products from American states that support Trump.
Trade-restrictive policies often target agri-food products because tariffs in this sector are generally higher than those applied to the manufacturing sector. Many countries implement protective measures to shield domestic farmers from foreign competition, making the agri-food sector sensitive to increased tariffs.
According to the WTO, average tariffs on agricultural products are nearly double those on non-agricultural goods. In 2021, average bound tariffs — the individual commitment made by all WTO members not to raise a tariff above a specified level — were 54.4 per cent for agricultural products and 27.6 per cent for non-agricultural products.
Similarly, most favoured nation tariffs — the tariff level that a member of the WTO charges on a product to other members — averaged 14.8 per cent for agriculture compared to eight per cent for non-agriculture.
A trend analysis of tariffs on agri-food products reveals a surge in most favoured nation tariffs on agricultural imports during the Trump administration. This increase in U.S. tariffs prompted retaliatory actions from other countries, driving up agricultural tariffs.
(World Integrated Trade Solution)
Canada-U.S. agri-food trade
The relationship between Canada and the U.S. is crucial for the agri-food sector in both nations, as they share one of the largest bilateral trading relationships in the world. The U.S. is Canada’s top trading partner, accounting for approximately 60 per cent of all agri-food exports and more than half of its imports.
In 2022, total bilateral agricultural trade between the U.S. and Canada reached US$66.2 billion, with Canada exporting US$37.6 billion and importing US$28.6 billion.
However, this trade relationship could face significant risks if protectionist policies from Trump’s previous administration were to resurface. That period was marked by heightened political tensions between Ottawa and Washington, disrupting trade flows and adversely affecting agricultural trade between the two nations.
During Trump’s tenure, agri-food bilateral trade essentially stagnated. Canada saw only marginal increases in agri-food exports to the U.S., while imports from the U.S. declined. It is no surprise that bilateral trade rebounded under U.S. President Joe Biden’s administration.
(United States Department of Agriculture)
Co-operation is the way forward
Bilateral trade is highly vulnerable to disruptions, as businesses factor risks and uncertainties into their cross-border trading decisions. When the perceived risk becomes significant, businesses are often reluctant to engage in international trade.
For Canada and the U.S., maintaining a stable and co-operative trading relationship is essential, especially for the agri-food sector, which underpins significant economic and employment activities in both countries. Highly integrated supply chains and logistical advantages allow both countries to be strong trade partners in agri-food trade.
As history has shown, open trade fosters mutual growth, while restrictive policies jeopardize not only bilateral relationships, but also the broader stability of the global trading system.
It remains to be seen how these policies will evolve, but the lessons of the past underscore the importance of collaboration over confrontation.