America and Canada are now embroiled in a bitter trade war.
On Thursday, the Trump administration, in a fit of irritation over ongoing NAFTA negotiations pulled the trigger and slapped Canada with hefty steel and aluminum tariffs. Hours later, Canadian Prime Minister Justin Trudeau rallied his army of trade experts and shot back with a slew of surtaxes on $16.6 billion worth of American products, designed to cripple manufacturers in key U.S states that are Republican strongholds.
A good portion of that list includes everyday items we consume like ketchup, mustard, pickles, toilet paper, maple syrup (yes we Canadians do import maple syrup from the States), bourbon and beer kegs.
Both sides have exactly a month to iron out their differences — Canadian tariffs on American products kick in July 1. If they don’t, it is both American and Canadian consumers that will ultimately bear the brunt of this tit-for-tat.
This is a well-researched fact: In trade theory it’s a concept known as deadweight loss.
When Canada imposes tariffs on American imports — like Trudeau just announced — that means the price of American-made products sold in Canadian stores will go up. So for instance, your Made-in-America Cottonelle toilet paper that sells for say, $10.99, might increase in price by a dollar (this is just an estimation because we don’t yet know the actual percentage of taxes the Canadian government will impose on American toilet paper).
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That price boost is a positive thing for Canadian producers of toilet paper because it’ll mean that they’ll gain more market share in Canada. But remember, we import $341.2 billion worth of goods from the U.S. — it will take a long while for Canadian manufacturers to be able to match demand, meaning that you might not be able to always purchase the cheaper Canadian toilet paper in every store across the country.
Deadweight loss theory concludes exactly that — despite local producers gaining a slight boost in profits, there is a net loss that is borne by consumers due to higher prices.
For American consumers, the same rule applies. When your own government imposes tariffs on another country, you will bear the cost of it. Trump’s tariffs on aluminum and steel imports from Canada, EU and Mexico will mean that any good that contains aluminum or steel will go up in price at American stores — beer and canned drinks are good examples.
So why did Trudeau retaliate?
In most trade wars, retaliatory measures are introduced as a threat, more so designed to put pressure on governments to come back to the negotiating table, than hurt consumers.
Let’s take the case of the EU. Back in March, when Trump hit the Europeans with steel and aluminum tariffs (he had exempted Canada at the time), the Europeans responded with a very strategic list that included tariffs on whiskey, simply because 95 percent of bourbon whiskey comes from Kentucky, home state of Senate majority leader Mitch McConnell.
The EU pledged that it would only activate its list of tariffs if Trump followed through with his steel and aluminum threat, which he did on Thursday morning. This particular trade war is now being fought out in the World Trade Organization, and the Trump administration has till June 18 to reverse its decision.
Trudeau’s response, all things considered, is necessary and appropriate in the world of free trade. The Canadian government is well aware of the impact a trade war will have on Canadian consumers, but the idea behind retaliation is to convince to U.S. to renege on its decision, not to punish average consumers.