Forget NAFTA. The Trade War With Canada Has Already Started
Prime Minister Justin Trudeau is preparing for the possibility the U.S. may pull out of NAFTA. For Canadian companies, the trade skirmish has already begun.
Recent sanctions against planemaker Bombardier Inc. and softwood lumber producers including West Fraser Timber Co. and Canfor Corp., as well as investigations into steel, aluminum and other industries threaten to make Canada one of the U.S.’s most-penalized trading partners.
The flurry of trade actions against Canadian companies highlights how U.S. protectionism goes well beyond the Trump administration’s decision this week on solar panels, which has hit Canadian Solar Inc., and that even America’s closest partners — those with largely balanced trade — aren’t immune.
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“There’s a pretty hefty chunk of our trade facing very high tariffs,” said Dan Ciuriak, senior fellow at the Centre for International Governance Innovation and a former deputy chief economist at Canada’s international trade department. “We’re facing a trade shock right now, in reality and in terms of rhetoric.”
Nowhere is this more evident than in North American Free Trade Agreement negotiations. Canada, the U.S. and Mexico have been negotiating since August to rework the 24-year-old pact between the three countries, who trade more than $1 trillion annually, under the gun from threats by President Donald Trump to withdraw. Yet the sanctions against Canada are a reminder that even free trade deals don’t guarantee free trade.
In the past three years, the U.S. has opened 11 investigations into Canadian exports including aircraft, newsprint and softwood lumber, compared with two investigations in the entire decade before that. In addition, the Trump administration has launched separate probes into aluminum, steel and solar panels.
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Peter Clark, a trade consultant and president of Ottawa-based Grey, Clark, Shih and Associates doesn’t see the number of trade cases against Canada slowing down. “They’re contagious,” he said by phone. “Once you start on them, they keep coming.”
Trade Troubles
Since 1994, the U.S. has opened 35 anti-dumping and countervailing duty investigations into Canadian imports, according to Bloomberg calculations on data from the U.S. International Trade Commission
Of the 35 investigations:
• 22 were opened before 2005.
• In the decade between 2005-2014, only 2 investigations were initiated: liquid sulfur dioxide and citric acid.
• The remaining 11 probes have all come since 2015. In addition to softwood lumber, aircraft and newsprint, they include supercalendered paper, polyethylene terephthalate resin, iron mechanical drive components and welded pipe.
To be sure, the increase in cases against Canada also coincides with an uptick in the number the U.S. has initiated against many of its trading partners, as the Trump administration pursues its America First doctrine. Not to mention the bulk of trade between the two countries remains tariff-free as long as NAFTA exists.
The number of cases relative to the overall volume of trade is small, said Terence Stewart, managing partner at law firm Stewart & Stewart in Washington and an expert on trade remedies. The increase in the number of Canadian cases isn’t noteworthy, he said, given how many companies trade across the border. Canada is the U.S.’s third-largest source of imports, after China and Mexico.
Punitive Measures
But the cases against Canada are hitting some of the nation’s largest sectors, with a third of the top 15 export industries affected. All told, about 11% of Canada’s exports to the U.S. are covered or could potentially be covered by punitive tariffs, up from just over 1% in 2016 and the most since NAFTA came into effect, according to estimates by Chad Bown, senior fellow at the Peterson Institute for International Economics in Washington. That’s approaching levels experienced by China, he said.
“These are big ticket cases,” Bown said by phone. “If you add all of these things up, then you actually do get amounts of trade that are affected by these things that are considerable.”
One impact is that, at least for trade negotiators, dispute resolution moves to the top of the list of contentious issues at NAFTA talks, underway this week in Montreal, where Chapter 19 could once again become a red line for the Canadian side.
Dispute Mechanism
A key U.S. demand is the removal of Chapter 19, a mechanism that allows companies to challenge anti-dumping and countervailing duty decisions made by other NAFTA-member countries. Canada insists the mechanism, which it has used successfully to overturn U.S. rulings, be preserved.
“It’s a real conundrum,” Clark said. “The amount of activity on the trade remedies has definitely increased.”
Since NAFTA took effect, Canadian companies have used Chapter 19 panels 52 times to challenge determinations by U.S. trade authorities, according to data from the NAFTA Secretariat. That includes three challenges initiated this month against U.S. determinations on Bombardier and softwood lumber.
With trade barriers rising, it’s hard to see why Canada would agree to remove Chapter 19 from NAFTA, Bown said.
“Given what the Trump administration has been doing in a couple of these really big anti-dumping and countervailing duty cases, there’s a really good chance the Canadian government will try to keep this thing in there,” he said.
With assistance by Andrew Mayeda, and Erik Hertzberg
