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CANADA – Canada, along with Mexico, is particularly heavily exposed to trade with the United States, and there is considerable speculation about how Canada should react if the United States moves unilaterally to implement protectionist policies, according to a new C.D. Howe Institute Working Paper.
In “Protectionism and Retaliation” authors Dan Ciuriak and Jingliang Xiao estimate the damage that would be done by a 10 percent tariff surcharge unilaterally imposed by the United States on its trade partners – and the effects if Canada retaliated with a 10 percent tariff of its own.
“The election of Donald J. Trump as President of the United States raises a litany of questions about the future of US trade policy,” states Ciuriak. “Canada, along with Mexico, is particularly heavily exposed to trade with the United States and there is considerable speculation about how Canada should react if the United States moves unilaterally to implement protectionist policies or demands renegotiation of existing trade deals to repatriate off-shored jobs and industry and to redress what the new President has described as “raw deals” for the United States,” he adds.
Amid such high uncertainty, the authors consider the implications of a historical example of an attempt to address so-called trade imbalances, namely the ‘Nixon measures’ of 1971. In particular, they model a Nixon-measures-type 10 percent tariff surcharge unilaterally imposed by the United States on its trade partners in order to put some numbers around what a protectionist policy might imply for all parties. The report also considers the scenario of a Canadian tariff of 10 percent against the United States to see whether Canada is better or worse off by retaliating.
According to the authors, the bottom line is quite simple: A protectionist policy by the United States will have as much impact on its exports as its imports and will generate an industrial revival in the United States only to the extent that it undermines other sectors of the US economy, reduces investment in the United States and possibly reduces the role of the US dollar in international transactions if the global supply of US dollars and US-dollar-denominated liquid assets becomes inadequate.
“Canada should avoid any temptation to retaliate and instead follow its historically validated policy of pursuing markets elsewhere, while continuing to shift its trade policy from border measures that no longer make sense in today’s highly integrated global production system to inside-the-border industrial policies targeted squarely at the future,” conclude the authors.
