Why Is Trump Waging a Trade War Against Canada?

GettyImages-688908758
Canadian Prime Minister Justin Trudeau and Donald Trump at the Summit of the Heads of State and of Government of the G7, May 27, 2017 in Taormina, Sicily. T STEPHANE DE SAKUTIN/AFP/Getty

This article first appeared on the Council on Foreign Relations site.

During the election campaign, Donald Trump protested mightily against the large trade deficits the United States was running with China, with Mexico, and even with Germany.

Not once did he mention trade with Canada as a problem.

And yet Canada—which is still the second largest trading partner of the United States, just behind China—is shaping up as the biggest test for the new administration’s trade policy.

The United States is now waist deep in no fewer than four major trade conflicts with Canada—over lumber, steel and aluminum, aircraft sales, and dairy.

Lumber is Canada’s third largest raw materials export to the United States, after oil and natural gas. Canada is the largest exporter of steel and aluminum to the United States, and aircraft are Canada’s second largest manufactured export after motor vehicles. Dairy has long been among the most politically sensitive of products because of the concentration of production in French-speaking Quebec.

RELATED: Canada's Trudeau and Trump Talk Border Control, Softwood Lumber

Collectively, these actions pose a major threat to Canada’s economy. The stakes, in other words, are extraordinarily high.

Americans are so used to ignoring Canada that it would surprise most to know that Canada has a long history of fighting hard for its own interests on trade. Canada was the first country to retaliate in kind against the infamous Smoot-Hawley tariffs passed by the Congress in 1930, initiating a series of measures to block U.S. imports and fighting a national election largely on the issue (the Conservative candidate, who favored still higher tariffs on U.S. goods, won).

Canada also negotiated aggressively and successfully in two rounds of free trade talks with the United States (the 1988 U.S.-Canada Free Trade Agreement and the 1994 North American Free Trade Agreement), and punched far above its weight in the Uruguay Round negotiations that created the World Trade Organization.

The four trade battles are distinct, but taken together they represent a broadside challenge to Canada, which still relies on the U.S. market for some 70 percent of its exports.

Over just the past few weeks, the United States has slapped hefty import tariffs on lumber, is threatening tariffs on sales of Bombardier aircraft to U.S. airlines, and is nearing the completion of a Commerce Department investigation that could block Canadian exports of steel and aluminum.

And U.S. agriculture secretary Sonny Perdue last week slammed the Canadians over what he called “unfair and underhanded” measures to restrict imports of U.S. dairy products.

The lumber fight is an old one, dating back to the mid-1980s. Canadian governments have long taxed timber differently than the United States, charging the companies a fee—known as “stumpage”—on timber that is primarily harvested from government-owned land. American timber producers have long complained that Canadian timber is underpriced, and that Canada’s governments are in effect subsidizing sales to the U.S.—mostly for home construction—which undercut U.S. timber companies.

The issue tends to be particularly acute when the Canadian dollar is weak against the U.S. dollar, as it is currently. But while the conflict has regularly flared up, the two governments have always worked hard to try to find negotiated compromises.

Not this time. The United States instead slapped import duties of up to 24 percent on Canadian timber imports in April, and a second round of tariffs is coming soon.

The aircraft fight is a new twist on an old dispute. Boeing, the largest U.S. exporting company, has been in a three-decade long struggle with Airbus, the European consortium, over dominance of the long-haul aircraft market.

Boeing argues, with considerable merit, that Airbus grew to capture about half the global market in no small part due to generous subsidies from France, Germany and the UK. Airbus in turn alleges that Boeing receives its own share of subsidies, not least through the big tax breaks offered by Washington State and other state governments.

RELATED: Canada Plans to Spend Big on its Military as US Withdraws

In decades of wrangling, however—including a decade-long dispute before the WTO—neither the United States nor Europe has resorted to unilateral trade sanctions against the other.

Bombardier, the Montreal-headquartered aircraft maker, is a comparatively small player, competing primarily with Embraer of Brazil in the market for smaller regional jets and short-haul propeller aircraft. But Bombardier’s latest models—its C-Series aircraft—for the first time will compete directly with Boeing’s smallest jet, the 737.

And Boeing has responded by launching a major trade case against Bombardier alleging that the company received unfair subsidies from Canadian governments, bringing the threat of new tariffs that could freeze Bombardier out of the U.S. market. The U.S. International Trade Commission ruled last week that the investigation could proceed.

On steel and aluminum, the Trump administration looks set as early as this week to impose sweeping new import restrictions in the name of protecting national security. President Trump said in a speech in Cincinnati last week that he was preparing to "stop the dumping" that is "coming in and killing our companies and workers."

Both steel and aluminum are sectors that face global gluts, largely because of increased Chinese production, and there are indeed serious trade distortions that need to be addressed. But Canada is an innocent bystander in the fight—a longstanding, reliable supplier of both products, including for U.S national security needs. Canada has insisted that its steel exports are in no way a threat to U.S. security.

The one place where Canada does truly have something to answer for is its longstanding restrictions on dairy imports. It is a touchy political issue in Canada —much like rice in Japan or cotton in the United States. Canada actually was prepared to open its market a bit further— as part of the Trans-Pacific Partnership (TPP) trade agreement that was concluded in 2015. But President Trump walked away from the TPP on his first day in office.

This litany of trade disputes will be a huge test of the U.S.-Canada trade relationship—and indeed of the future of U.S. trade relations with the rest of the world. Canada seems unlikely to turn the other cheek if the Trump administration slaps on further import restrictions.

The province of British Columbia has already asked the federal government to block exports of thermal coal, mostly from Montana, which is currently being shipped to Asia through Vancouver. B.C.’s Premier Christy Clark, who recently won a narrow re-election, said: "We've gone from seeing Americans as being good trading partners to being hostile trading partners." The fallout is likely to be worse if Canada gets targeted by the restrictions on steel or aluminum.

The message that would be sent to the world by two such close allies and partners as the United States and Canada engaging in a genuine trade war would be enormously damaging not just to the two countries but to the integrity of the global trading system.

The U.S. and Canadian governments need to find a way to come together quickly to negotiate sensible compromises that respect the economic interests of both countries.

Edward Alden is the Bernard L. Schwartz senior fellow at the Council on Foreign Relations (CFR) and author of Failure to Adjust: How Americans Got Left Behind in the Global Economy.