Trump Takes First Steps In A Trade War With Canada

The United States announced that preliminary anti-subsidy duties on imports of Canadian softwood lumber would take effect this week. Late Monday, Commerce Secretary Wilbur Ross confirmed Monday that the Trump administration made the move, escalating a long-running trade dispute between the neighboring countries. Ranging from 3% to 24%, the decision which affects some $5.66 billion worth of imports of the construction material, comes before anti-dumping duties that are slated to be announced June 23, which could raise the total to as much as 30%-35%. The Commerce Department also said it found “critical circumstances,” and hinted that tariffs will be applied not only immediately, but also retroactively 90 days.

The tariff sets an unprecedented tense tone between Canada and the US just as President Trump prepares to renegotiate the 23-year-old North American Free Trade Agreement (NAFTA). Softwood lumber has always been a point of contention between the two nations dating back to the 1980s, but this is a bold move, especially at such a crucial time. Trump has repeatedly stated that changing NAFTA to benefit the US more is one of his top priorities. Given the cordial tone of the visit from Canadian Prime Minister Justin Trudeau though, Trump’s move surprised many.

Canada quickly denounced Trump’s decision, with Trudeau sharing a phone call with Trump Tuesday evening vowing that “Canada will vigorously defend the interests of the Canadian softwood lumber industry.” Ross accused Canada of “already retaliating” against the US well ahead of the lumber duties by restricting imports of US dairy products. Canadian Natural Resources Minister Jim Carr and Foreign Minister Chrystia Freeland countered in a joint statement, saying that the accusations “are baseless and unfounded” and would ultimately hurt Americans by raising US home construction and renovation costs.

Last week Trump called Canada’s dairy protections “unfair,” with Ross following up telling reporters about how Wisconsin dairy producers were now “losing their farms” because of the restrictions. “Apparently Canadians now are coming down and saying: ‘Since you can’t do it anymore, I’ll buy your equipment for 5 cents on the dollar.’”

Here’s a crash course on the dairy crisis Trump and Ross are referring to, because I’ll readily admit I was unfamiliar with it myself. Canada has long maintained a high tariff wall on most dairy products to keep imports out of the country and prop up higher domestic prices. Excluded from NAFTA rules are ultrafiltered milk and other protein-rich dairy products used to make cheese and yogurts, and so US dairy farms had strong sales in these products- an estimated $133 million annually in previous years. However, last year Canadian dairy farmers and producers persuaded regulators to create a new lower-priced class of industrial milk to produce protein products within Canada using Canadian milk. Thanks to this, US imports fell dramatically in 2016.

What is really at stake here is the uniquely Canadian regime of supply management. It governs pretty much every aspect of milk, chicken, and egg production up north. The system depends on three ‘pillars’ to generate market prices: a) a tariff wall to block imports, b) strict quotas that determine how much each farmer can produce and c) fixed prices paid to producers. The system was created in the 1970s to help stabilize farmers’ incomes, but as the market has become global, the system has created friction among Canada and other countries. The World Trade Organization ruled that the high prices paid to Canadian farmers are subsidies, making exports difficult for the Canucks. This may come up in NAFTA negotiations, although Canadian ambassador to the US, David MacNaughton, quickly pointed out that even with supply management, the dairy trade between the two countries favors the US by five to one.

Complaints about subsidies were one of the main driving forces when US lumber producers asked the Commerce Department to investigate Canadian softwood lumber imports last November. The industry cried foul because Canadian competitors can cut their timber from government lands at cheaper rates, while the US counterparts must generally procure their lumber from private land- they view this practice as a type of subsidy from the Canadian government, and the Commerce Department agreed.

“It has been a bad week for US-Canada trade relations,” Ross stated. “Last Monday, it became apparent that Canada intends to effectively cut off the last dairy products being exported from the United States. Today, in a different matter, the Department of Commerce determined a need to impose countervailing duties of roughly one billion dollars on Canadian softwood lumber exports to us. This is not our idea of a properly function Free Trade Agreement.”

I think it’s pretty clear that the softwood lumber tariff is directly linked to that interview on Fox with a Wisconsin dairy farmer who fell on hard times and completely blamed Canada. Trump was obviously watching, and in true Trump fashion decided to react in the quick, emotional nature we’ve quickly grown accustomed to. Joining the ranks of China and Mexico, Canada now seems to be Trump’s latest enemy.

There is some discussion that this is all a negotiating ploy in the run up to NAFTA talks.

“This move shouldn’t be seen as anything other than a shakedown,” said Duncan Davies, chief executive of Vancouver-based Interfor Corp, one of the companies directly mentioned in the tariffs. Two-thirds of his company’s production are in the US, leading him to believe that the US claims are without merit. “Log costs are significantly less in some regions of the US than in Canada.” One senior Prime Minister Office employee even predicted some show of strength last week, noting that it would be in line with Ross’ patented shock-and-awe negotiating tactics.

“This is textbook negotiating style,” the source told Macleans. “They try to rattle the cages and get people to freak. We don’t do freak.” Unfortunately, the impact on the Canadian economy may be enough to get people to freak out over the loss of revenue and subsequent thousands of jobs cut. So why is Trump targeting the gentil, maple-syrup sharing nation?

It’s probably a combination of factors for Trump. Aside from Trump’s penchant for echoing the last thing told to him via Fox News, he’s been having a rough time with trade, which was one of the top issues he said he would address while he was campaigning. He can’t get his nominee for chief trade representative, Robert Lighthizer, confirmed. He ran into many hurdles while trying to start the formal process towards a NAFTA renegotiation. And he’s been forced to back down from a trade fight with China, which was one of his rallying war cries before he was in office. Combined with pressure from Ross, championing this cause would presumably gain him more support. Wisconsin is a major dairy producing state, one he narrowly won in the November election. And it’s home to Paul Ryan, the Republican House speaker and a necessary key ally for the President’s legislative agenda in Washington. The tough talk on dairy is also a key issue for Congressional Democrats such as Senate leader Chuck Schumer of New York, who has been leading the loud protests against Canadian dairy policies for awhile. Trump will need the support of Schumer and other key Democrats to renegotiate NAFTA, but also on the tax reform and health care changes he’s claimed to be planning.

It seems more and more likely that Trump is just hunting for cheap political wins. He’s desperately attempting to validate his first 100 days in office given his widely discussed failing and constant and expensive jaunts down to Florida. There’s been a flood of bizarre tweets again, presumably to distract people since he was once again talking about the popular vote and fake news without any evidence. He then gave a fact-free, stream of consciousness interview to the Associated Press where he made outrageous claims, such as how he had never heard of Wikileaks before the election (not true) or that he never had a first 100 days agenda (which he did). The colossal failure of his health care act showed just how precariously balanced his power is, and revealed Trump’s inability to work with his fellow Republicans in Congress. For a party that holds the majority of almost all governing bodies, the Trump administration has garnered no legislative credibility thus far.

Trump is desperately trying to prove he can do something as president, even if it’s starting a trade war with our closest ally. They’re an easy layup, and a convenient scapegoat for job losses and revenue drops that he was previously blaming on Mexico, China, and then immigrants. It’s someone new to rally the troops against, despite the fact that it appears he’s done very little research into the topic. Canada may be our happy, welcoming neighbors, but something tells me they’re not going to take this lying down.

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