By Peter G Hall, Vice-President and Chief Economist
Glad it’s over? The declaration of Donald Trump as 45th President of the United States on Tuesday night wraps up an historic campaign. Election periods always have a good dose of intensity and anticipation, but this one redefined the battlegrounds and the rules of engagement, radically. For all its rancor, one thing that both candidates agreed on was singling out international trade, and how it’s structured today, as a key enemy. That’s very bad news for America’s trading partners – and since we’re their biggest one, we may well be the most at risk. What does the victory of Trump and the Republicans mean for Canada?
Let’s take a close look at Trump’s main international trade proposals. His promise to scrap NAFTA is likely his best-known anti-trade measure. However achieved, the effects of this on Canada would be very significant. At a minimum, it seems that we would be reduced to WTO most-favoured-nation (MFN) status, equivalent to slapping an across-the-board 3.5 per cent tariff on all goods and services exports from Canada to the U.S. The result would be similar if it took us back to our pre-Canada-U.S. FTA arrangement, meaning re-imposition of a 4 per cent average tariff on exports to the U.S. Our scenarios don’t stop there, though. Given the Trump plan to increase average tariffs 35 per cent on Mexican and 45 per cent on Chinese imports, it is somewhat likely that a Trump Administration might go further with Canada too. To cover for this, we ran a scenario where average tariffs are hiked 10 per cent.
Don’t hit the panic button just yet. Elections are big on rhetoric; reality can be quite different, for a number of reasons. First, the new President has access to an army of advisors who may counsel strongly against campaign ideas. Second, compromises on policy direction are often made along the way to secure needed endorsements. Third, the President may not be able to muster sufficient support in the House and the Senate to pass measures, and indeed, these representatives may have their own policy measures in mind. Fourth, given current divisiveness, elected representatives may well carry out their mandates along ideological, not party, lines. And finally, there’s the timeline – certain proposals may well transcend the President’s mandate.
On the first point, it is essential to understand how tightly locked-in the Canada-U.S. business relationship is. More than 35 states – largely Republican states – count Canada as their top sales market. Indeed, trade with Canada directly supports 1.7 million U.S. jobs. Canadian firms operating stateside directly employ 600,000 Americans. Supply chains tightly entwine our two countries. Take the auto sector, for instance: each assembled vehicle shipped to the States from Canada has 63 per cent U.S. content. Disengaging would be a very disruptive process for the U.S., and during the period of disruption, it would certainly not appear to the average American businessperson or consumer to be in their best personal interests.
Here’s where anti-trade proposals seem to break down. Suppose policy hurdles are cleared; they still have to sell in the court of public opinion. The core aim of anti-trade proposals is to make average Americans better off. Trouble is, most, if not all, of them will vastly increase costs to business, which are ultimately passed on to the consumer. All things being equal, investment would hesitate, along with hiring, and local big-box stores would hike prices, not to mention the impact on the public purse. It’s hard to imagine Americans, angry enough at post-recession policy failures, warming up to the ultimate effects of these ones.
So much for current policies; what about the future of trade? The Trans-Pacific Partnership, the 12-country, next-gen trade deal now ready for signing, was cast into doubt by both candidates. It’s hard to imagine America walking away from this deal, given its benefits, the deep cost to U.S. influence in the region, and China’s readiness to promote its own regional deal. But turning the tide of public opinion will now take a monumental effort.
The bottom line? America’s election was, among other things, a referendum on modern international trade architecture. History will decide whether the debate was even necessary. The U.S. economy is strong and gaining momentum, but the election convinced Americans otherwise. Let’s hope that it doesn’t all prove to be prosperity’s undoing.
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