Trade war with Canada

Why Trump is starting a trade war with Canada

The president can look tough on tariffs against a country that can’t retaliate.

By ADAM BEHSUDI

President Donald Trump’s administration fired its first shot in a potential trade war, but it’s not Beijing or Mexico City in the crosshairs. The target: Our friendly neighbor to the north, Canada.

Trump has escalated what were modest and longstanding frictions with Ottawa over U.S. dairy products and Canadian lumber into a full-blown trade dispute largely because Canada is an easy target and doesn’t have many weapons to fight back. By slapping a massive tariff on Canadian lumber, while touting his protection of dairy farmers – especially in Wisconsin, a key swing state – Trump has a chance to look tough and decisive on the international stage as he tries to renegotiate NAFTA, one of his big campaign promises.

“Canada is an easy villain,” said Laura Dawson, director of the Canada Institute at the Woodrow Wilson Center. “They cannot retaliate with the force of a China or a Mexico. It’s not like Canada is going to open up the border and let a whole bunch of Central Americans into the United States. So Canada is a pretty safe target.”

The Commerce Department on Monday announced a preliminary decision to hit more than $5 billion worth of softwood lumber imports from Canada with tariffs of up to 24 percent. The announcement comes on the heels of Trump continuing to hammer Canadian policies that have effectively blocked certain U.S. dairy exports north of the border.

Commerce Secretary Wilbur Ross acknowledged that there are few “legitimate” retaliatory actions Canada could take.

“I’m not aware of anything that we have violated, so I don’t know what it is they could that would be a legitimate action,” he said at Tuesday’s White House briefing.

But the real-world impact of new lumber tariffs could be significant, especially for a U.S. housing industry just now reaching a point of recovery. The National Association of Home Builders estimates that market uncertainty caused by the prospect of tariffs has already increased lumber prices, resulting in the addition of almost $3,600 to the price of a new home.

Ross downplayed the effect of the tariffs on lumber prices in the U.S.

“We do not think the price of lumber will go up by anything like the 20 percent but there may be some small increase in the price of lumber for a house,” he said, adding that lumber is a “pretty small percentage” in the total price of a house.

Following the tariff announcement, Ottawa warned that the penalties would make U.S. housing more expensive and cited a National Association of Home Builders estimate that even a $1,000 increase in the cost of a new house could put home ownership beyond the reach of 150,000 American families.

Canadian officials say the tariffs will negatively affect workers on both sides of the border.

“Canada buys more from the U.S. than any other country – including the EU, Mexico, China, and Japan,” Canadian Foreign Minister Chrystia Freeland said in a recent statement. “We are America’s number one customer.”

Trump’s recent attacks may just be a negotiating tactic of hitting hard first, then slowly walking negotiations back. Even though the lumber case will proceed, the administration could revive efforts to negotiate a settlement – either through separate talks or in NAFTA discussions -- if Canada moves to ease its dairy restrictions.

“Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!” Trump defiantly tweeted Tuesday, seemingly linking the issue with the recent lumber tariffs.

He slammed Canada on dairy and lumber issues last week, calling them “another NAFTA disaster.”

Ross drew an even more explicit connection Tuesday between the issues of lumber and dairy and NAFTA’s perceived failings.

“If NAFTA were functioning properly you wouldn’t be having these sorts of very prickly, very unfortunate developments back to back,” he said. “In that sense it shows that NAFTA has not worked as well as it should.”

He added that NAFTA’s failure to address U.S.-Canada dairy trade is one of the agreement’s “problems.”

In Congress, Senate Agriculture Committee Chairman Pat Roberts (R-Kan.) warned that the president’s tough talk toward Canada on its dairy policy was “asking for trouble.”

“Any time you have a subject that stirs the waters like this, it makes other issues more difficult,” Roberts said, when asked if the president’s stance could muddy an effort to renegotiate NAFTA. “We’d like to separate it, of course. I think it could be a problem, but it’s not anything we can’t surmount.”

Ross, however, cast doubt on whether the tariffs could spark a larger trade war, telling CNBC earlier in the day that the actions represented “a very precise set of tariffs on a very precise set of imports.”

Lumber and dairy trade frictions between the U.S. and Canada are in no way new.

The lumber decision is the latest in a 30-year struggle by the U.S. to manage the trade impact of Canada’s timber wealth. The decision on Monday was the result of a case filed by U.S. lumber producers last year who claim that Canadian imports are underpriced and subsidized as the result of provincial governments giving companies cut rate access to timber on vast public lands.

The dairy issue has also dogged trade relations between the two countries for decades. U.S. dairy exports are already largely shut out of the Canadian market because of a supply management system set up to stabilize the incomes of Canadian farmers. U.S. producers, however, were able to find a loophole in the system to ship roughly $133 million of ultra-filtered milk to Canada last year. That export boon is likely to end with a new Canadian industry pricing policy that favors domestically produced product.

But under previous administrations, it’s unlikely the two issues would have risen to attention outside the insular world of trade officials and industry groups meeting between Washington and Ottawa. President Barack Obama last year referred to the lumber issue as a “minor irritant” – a major shift from the provocative Tweets and combative statements of 2017.

“Dairy and lumber are anomalous and they shouldn’t be used as indictments of the broader North American trading project,” Dawson said.