Tariffs not that unusual in Canada-U.S. trade relations

An economist says protectionism has been the rule rather than the exception over the years between the two countries

MOOSE JAW, Sask. — U.S. President Donald Trump’s move to protectionism isn’t all that unusual, considering the trade history between the United States and Canada, says University of Saskatchewan agricultural economist Richard Gray.

He said the last 20 years under the North American Free Trade Agreement have been the exception rather than the rule.

He told the Farming For Profit? conference last month that there is a long history of tariffs and protectionism between the two countries, and also a long history of Americans introducing tariffs to protect incomes.

That hasn’t always worked, however.

For example, in 1930 after the stock market crash, the Smoot-Hawley Act increased tariffs on 900 imported goods by 40 to 50 percent, Gray said.

But as the U.S. became more protectionist, other countries responded with their own tariffs and that led to a tit-for-tat situation similar to what is happening today.

“Global trade decreased by 65 percent thereafter, making the global depression a lot worse,” Gray said. “It became a recognized example that tariffs can be very disruptive to the economy.”

Efforts under the General Agreement on Tariffs and Trade after the Second World War led to more trade liberalization, but that was hindered by stagflation in the 1970s.

Canada and the U.S. struck a two-country free trade agreement in 1988. Mexico was brought in and NAFTA was signed in 1994.

“Canada was actually a little reluctant because they had a very privileged trading relationship with the U.S.,” Gray said. “But they also realized if Mexicans joined then they had the largest trade area of the world in terms of population and GDP.”

Agriculture didn’t figure largely in the decision to go ahead, he said.

The World Trade Organization followed in 1995.

“I remember thinking maybe our work was done as trade economists,” Gray said. “There were so few distortions left. I guess we (now) probably have a new era of being able to look at trade again going forward.”

Following the WTO, the world entered a fairly strong period of economic growth, although so-called free trade wasn’t perfect. Non-tariff trade barriers persist, as do direct farm subsidies in some countries.

But Gray said the current situation in the U.S. is largely due to the post-2007 crash and recession. By 2016 the U.S. faced chronic unemployment, especially in the coal, steel and auto industries. The auto sector in particular lost jobs to automation.

“Trump, sensing that there was an issue, a base he could appeal to, blamed trade for the problems,” Gray said.

He promised to fix the situation by imposing tariffs.

Gray said Trump has a mercantilist view of trade in that he sees winning a trade war as exporting more than you import.

“He also thinks he can win trade wars. He should go back and look at what happened with the tariffs in 1930.”

Countries are once again responding by imposing their own tariffs.

And Trump persists even though many industries, including agriculture, want liberalization.

Gray added that the fake facts feeding the debate don’t help.

In the dairy sector, for example, the U.S. exports more cheese than Canada does. It allows only two percent of production to come in at a tariff rate quota of 12 percent, while Canada allows four percent in at a one-percent tariff.

According to the Organization for Economic Co-operation and Development, market price support in the U.S. is higher than in Canada.

“Listening to Trump, you would swear that Canada has this very elaborate system of protection that’s giving Canada this unfair protection but he forgets to mention that their industry is even more protected in many respects,” Gray said.

He wouldn’t predict the outcome of the current trade war, noting that Trump often turns on a dime.

“I don’t think we should do much trend line forecasting about where he’s headed,” he said.

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