What will it take for Trump and Trudeau to make peace?

The stakes are high — the last time America was engaged in a trade war, unemployment rose 25%.

by Vanmala Subramaniam
Jun 13 2018, 12:56pm

Canadian Press Images

From U.S. President Donald Trump’s perspective, everything was fine and dandy at the most recent G7 summit in Quebec, until Canadian Prime Minister Justin Trudeau decided to hold a press conference asserting that his government would not be “pushed around” by the U.S. when it comes to issues of trade.

“I see the television and he’s giving a news conference about how he “will not be pushed around’ by the United States. And I say, ‘push him around? We just shook hands!’”, Trump said at a press conference Tuesday in Singapore, following an historic meeting with North Korean leader Kim Jong-Un. “We finished the G7 meeting and really everybody was happy.”

This latest barb in the ongoing spat between Trump and Trudeau makes it unlikely that tensions between both countries might ease anytime soon. Come July 1, if the status quo remains, tariffs will be slapped on $16.6 billion in American-made products coming into Canada. Trump will likely push back, broadening his tariff threat beyond steel and aluminum, to other Canadian-made imports.

So, what will it take for this trade war to end?

If the American economy tanks

“That’s the billion dollar question. Right now, it seems that there’s nothing preventing the Trump administration from acting in any way that it wants.” says Patrick Leblond, a senior fellow at the Centre for International Governance and Innovation and an expert in international trade. “But things might change during the midterm elections. Americans might say, ‘Enough is enough. Why are we always fighting with every country?’”

That’s the silver lining in this trade war, Leblond believes. If American consumers start feeling the pinch of rising prices from tariffs, and American manufacturers see their quarterly profits taking a dip, the Republican party could suffer some stinging defeats in November’s election, weakening the Trump administration politically.

The last time America was engaged in a trade war of this magnitude, unemployment rose to 25 percent, and the economy virtually ground to a halt. We know this period in time as the Great Depression — it was exacerbated by steep tariffs slapped by several nations including Canada on certain American agricultural products like eggs and dairy, in response to the Smoot-Hawley Act of 1930, a bill designed to protect American farmers by imposing tariffs on U.S. imports of agricultural goods.

Of course, the Great Depression was triggered by a vast number of other factors, but most economists are in consensus that the Smoot-Hawley Act only worsened an already precarious economic situation, given that U.S. imports fell 40 percent over a period of two years.

According to a study conducted by the C.D. Howe Institute, Canada’s retaliatory tariffs will cost the U.S. economy up to 23,000 jobs and reduce its GDP by 0.06 percent. Canada, however will take the bigger hit — a loss of 0.11 percent to its GDP and the potential shedding of 6,000 jobs, in a country that has a labour force one tenth the size of America’s.

In fact, American manufacturers are already beginning to feel the impact of these trade tensions. Thor Industries, a recreational vehicle maker based in Indiana has said that its manufacturing costs are climbing — raw material and commodity-based components used to make RVs are going up in price, simply because of the headwinds created from the “implementation of steel and aluminum tariffs and other regulatory actions,” the company’s CEO said in a statement last week. There’s no question that other vehicle manufacturers dependent on Canadian steel and aluminum will soon start feeling the price crunch as well.

“The longer this plays out, the more it is going to hurt the U.S economy and that could have a negative political impact on Trump,” Leblond told VICE News.

Better Canadian negotiators?

But that doesn’t necessarily mean that as long as Trump is in the White House, trade spats will continue between the U.S. and Canada, says Michael Hart, Professor Emeritus at the Norman Paterson School of International Affairs at Carleton University, and a former senior adviser on trade issues to the Liberal government of Jean Chrétien in the 1990s.

“Trump believes in throwing out very bold gestures. That’s his style, it’s very bombastic. We need to send an adult to Washington, not just someone with fake eyebrows,” Hart told VICE News, taking a jab at Trudeau, whose G7 press conference with French President Emmanuel Macron over the weekend appeared to show Trudeau’s left eyebrow slipping down his face, setting of a social media rumour that the prime minister donned fake eyebrows.

“Canada says it really believes in free trade. If that’s the case, then let’s have a real free trade agreement.” Hart said.

Hart believes that to end this trade war, the Canadian government needs a better, more skillful set of negotiators who can effectively navigate the White House, given Trump’s volatility and tendency towards impulsive, combative declarations against other countries. “If you try to belittle Trump and tell him what to do, he gets angry. I think Trump really believes that trade agreements have favoured large corporations and cost the average American worker, and he’s not entirely wrong in thinking that way — we need to understand that.”

But in fact, as soon as Trump was inaugurated a year and a half ago, the Trudeau government assembled an elite team of sorts known as ‘Team Canada’ within the confines of the prime minister’s office, tasked with forging strategic connections with certain members of congress, governors and Trump aides, according to the New York Times. Casting aside political differences, Trudeau even enlisted the help of former Conservative prime minister Brian Mulroney — who has known Trump for decades — in helping negotiate directly with Trump during the first few months of Nafta discussions. “I worked on a way to make certain that the prime minister got to Washington very early to start to build a relationship with President Trump on a personal basis,” Mulroney told the New York Times recently. And indeed, in the early days of the Trump administration, Trudeau seemed to be in the U.S. president’s good books, which is what makes this latest skirmish even more troubling.

But Hart thinks that Canada, in dealing primarily with U.S. trade representative Robert Lighthizer, is in fact negotiating with the wrong person. “Lighthizer is a protectionist lightweight. Chrystia Freeland should talk directly with [U.S. Secretary of State] Mike Pompeo,” Hart says.

(Freeland is actually scheduled to visit DC this week to meet with the Senate Foreign Relations Committee — it’s unclear if Pompeo will be present, although trade is expected to be on the agenda.)

Renegotiating on dairy

Although the Trump administration is using “national security” as the main justification for imposing steel and aluminum tariffs on Canada, Trump’s real beef, so to speak, comes from Canadian tariffs on American dairy products — some of which, as Trump has correctly pointed out, are up to 270 percent.

A renegotiation on Canadian dairy imports from the United States that benefit both American and Canadian farmers could potentially ease current tensions, according to Stephen Kelly, who served as the American consul general in Quebec City and deputy chief of mission in Ottawa. “It’s not just about Trump and Trudeau. This has been an irritant for many years,” he told the Atlantic recently.

At the heart of the decades-long trade disagreement on dairy is Canada’s supply management system — covering dairy, eggs and poultry — which has allocated domestic production quotas on each of those industries in order to maintain stable prices and guarantee Canadian farmers a steady income.

The problem is, in order to ensure the Canadian market isn’t flooded with too much supply which would bring down prices, the Canadian government imposes steep tariffs on American dairy products, effectively barring them from being imported. Trump wants that supply management system to be dismantled altogether — a concession that Canada’s former prime minister Stephen Harper actually somewhat agreed to during negotiations of the Trans-Pacific Partnership, a trade agreement that Trump withdrew from as soon as he took office.

From the Canadian point of view, the U.S. subsidizes its own dairy industry, making Canadian cheese and milk far more expensive to American consumers — so why would a system that benefits Canadian farmers have to be torn apart simply to allow American farmers to gain access to the Canadian market? And for Trudeau, appeasing Canadian dairy farmers — 80 percent of whom reside in vote-rich Quebec and Ontario — is a priority ahead of the 2019 federal elections, all but removing the likelihood Canada will budge on its dairy tariffs. “You either resist and ruin the economy or you give in and get creamed in the next election for selling out, Jack Granatstein a Canadian professor of history at York University told the New York Times.

“This could drag on for months, even years.”

If all else fails, and both the U.S. and Canada are unwilling to waver on their trade positions, the brawl will be sorted out by the World Trade Organization — an international body that is tasked with resolving disputes of this nature. Last week, Canada joined the EU in launching a WTO dispute complaint against America’s steel and aluminum tariffs — the WTO consultation process gives all parties 60 days to negotiate at the table, before proceeding with litigation.

But the WTO process can be achingly slow, says Leblond. “When you get to the WTO, that will take a while. There’s a whole consultation process even before you get to a panel of arbitrators. This could drag on for months, even years.”

At the end of the day, says Hart, the easiest way forward would be for Trump and Trudeau to work together to figure out how to come to some sort of consensus that would benefit both sides.

“But the hiccup is, Trudeau wishes Trump wasn’t a bully, and Trump wishes Trudeau would just listen.”

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