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Canada/US Trade War Still Raging in Steel Sector

Jay Brahach October 2, 2018

The forging of a new North American trade pact has prompted widespread relief in financial markets and a substantial rally in the Canadian dollar, but the continental trade conflict continues on one critical front – the aluminum and steel tariffs imposed on Canada and Mexico.

There were indications Monday of further discussion of the metals tariffs between Washington and Ottawa. But for the moment, the 10% tariff on Canadian imports of aluminum and 25% tariff on steel remain in place, with negative consequences for Canadian steelmakers and aluminum suppliers, a wide range of US manufacturers, and consumers in both countries.

The new trade deal, called the United States Mexico Canada Agreement, or USMCA, addressed some key trade irritants between Canada and the US, including intellectual property protection and import restrictions in the dairy sector. But it did not address the steel and aluminum tariffs.

After the deal was announced Monday, Ken Neumann the leader of Canada’s steelworkers’ union, said it seemed that “Canadian steel and aluminum workers are among those being sacrificed in the concessions made by the Liberal government in this deal.”

US President Donald Trump imposed the metals tariffs on Canada and Mexico in June after earlier exempting them, along with the EU, from the broadly imposed tariff.

The justification the US cited, under Section 232 of the Trade Expansion Act of 1962, was the potential threat to US national security from Canadian and Mexican imports. That seemed bizarre to Canadians, who are accustomed to thinking of the US as their country’s closest ally.

But there’s actually a long-standing legacy of steel protectionism in the US that can be traced back to the first half of the 20th Century.

In the era before nuclear weapons, a nation’s ability to produce steel was perceived to be directly linked to its military power. It was argued that reliance on imports could cause America’s native steel industry to wither away.

This argument was used as a justification for protectionist policy throughout the cold war era, and was even mentioned in 2002 when Bush invoked the tariffs on steel under Section 201 of the Trade Expansion Act. Canada was exempt at that time given the NAFTA agreement.

Economically, however, the national security argument for these tariffs is tricky to justify. At the height of WWII, only 40% of steel capacity was used for military operations in the US, and during the Vietnam conflict only 2.2% was used. If anything, the negative implications of these tariffs, especially with trading partners you may need during a conflict, is more likely to leave you in a vulnerable position.

Why is this argument still given serious consideration? The answer has very little to do with national security, but much to do with political incentives. From a bureaucratic perspective, the national security clause is like a loophole in the GATT agreement which allows countries to bypass WTO scrutiny. After all, it is difficult to prove that protecting a strategic industry from outside competition is not in the interest of national security.

From a political perspective, the trade tariffs suit Trump’s rhetoric of “America First” approach, appealing to interest groups in the Rust Belt region.

But the strategy pursued by the Trump administration is a risky one. Whilst appealing in part to steel unions, they have also alienated manufacturers who use imported steel for their products, and risk alienating consumers as well.

The ultimate losers are consumers in both the US and Canada. Statistics Canada has already suggested retaliatory tariffs initiated by the Canadian Government have increased Canadian CPI by 0.07 percentage points. As households are not the primary buyer of raw steel products, the impact on consumer prices will not be immediately felt. But when input costs are consistently higher for manufacturers, pressure is likely to filter through.

Since the tariffs have been implemented, over 50,000 tariff exemption requests from manufacturers have been received by the US Commerce Department, and processing times for them have been slow.

Assurances of support for manufacturers affected by the tariffs within a range of industries, from packaging to oil & gas, have been few and far between. There are no guarantees that US producers can meet domestic demand for specialized steel products, and manufacturers are being penalized financially for having to look further afield.

It is not certain that steelworkers in the States are even going to see real benefits from this policy. In September, hundreds of steelworkers have implemented strikes across the Greater Pittsburgh area over contract negotiations with US Steel. Any positive sentiment gained by the administration from US steel workers could easily be eroded by such events in the industry.

Canada’s federal government has provided support for businesses affected by the tariffs, including those harmed by the counter tariffs Ottawa launched in response to the metal tariffs. In addition to tariff relief programs, C$2 billion is available to Canadian companies impacted by the counter-tariffs through federal programs, announced at the end of June.

The resolution of the NAFTA negotiations is broadly positive, and may signal a co-operative approach that will help resolve the metal tariffs. But in the meantime, an important sector of the Canadian economy is still suffering from President Trump’s trade crusades.

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Jay Brahach
Business Development Associate
jbrahach@cambridgefx.com

Don Curren
Content Editor and Strategist
dcurren@cambridgefx.com

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