THE MADNESS OF TRUMP

The world can save free trade — but it won’t be easy, says Gordon Ritchie

It would be a mistake to dismiss the latest protectionist actions by the Trump administration as cheap bullying tactics and wait for common sense to prevail. Setting aside the buffoonery, in less than 18 months Trump and the likeminded team he has painfully assembled have made substantial strides toward dismantling the world liberal economic order his predecessors painstakingly built over the past 70 years.

Looking back, it is quite remarkable that amid the ruins of the Second World War a group of inspired statesmen, very much led by the Americans but with substantial contributions from the United Kingdom and Canada, conceived such a rewarding transformation of the world order. America was dominant, representing half the total world economy, and there were many who were tempted to use that power to extract maximum advantage from the weakened allies and shattered enemy. Instead, starting with the Marshall Plan and followed by the multilateral institutions to govern world trade (GATT), finance (IMF), and security (UN, NATO), the Americans understood that by sharing the benefits with their partners they could achieve much more for global peace and prosperity and thereby for themselves, far beyond anything achievable through an “America First” approach. They had learned the bitter lessons of the consequences of the attempt in the 1920s and 1930s to go it alone, epitomized by the high unilateral tariffs (the Smoot-Hawley Act) and contributing to the Great Depression and the Second World War.

These lessons are, unfortunately, forgotten by many Americans and ignored, or never learned, by Trump and the strange collection of ahistorical and uninformed collaborators (Larry Kudlow, Peter Navarro, et al) who now staff his White House. He has embarked on a systematic program of disruption and destruction of the existing world economic order with a campaign of Making America Great Again at the expense of America’s closest allies.

At first glance, these seem to be the convulsions of an unhinged mind but with hindsight there is method to this madness.

On his first day in office, he ceremoniously withdrew the United States from the negotiation of the expanded Trans Pacific Partnership, kissing goodbye to Barack Obama’s goal of setting up an economic counterweight to China.

He has now embarked on a needless trade war against America’s closest European allies: Germany, France and Britain. Obviously, the tariffs on steel and aluminum imported from the European Union are wrong-headed and illegal under established international rules as the World Trade Organization will undoubtedly rule — unless, that is, the Americans are successful in their efforts to paralyze the work of that organization.

It is against this backdrop that Canadians should understand Trump’s latest assault on Canada.

First, he threatened to tear up the North American Free Trade Agreement unless it was renegotiated to tilt the balance of advantages substantially in favour of American producers. As one of the principal negotiators of the original Canada-U.S. Free Trade Agreement, I can attest that Canada has benefited enormously from the reorganization of our economy on the basis of free cross-border trade — but so too has the United States. I have no idea whether Trump, despite all the factual evidence, including his own administration’s statistics and analysis, actually believes the canard that the “mean” Canadians have somehow taken advantage of his “stupid” predecessors (notably Ronald Reagan and James Baker, Jr.) as evinced by the huge trade surplus of “billions and billions of dollars” in Canada’s favour (transparently false). But, as he revealingly commented recently, even if he has made this all up, it serves his purposes as a bargaining tactic.

I was personally not in favour of extending the Free Trade Agreement to include Mexico in a North American Free Trade Agreement (NAFTA) because of concern over the complications, more political than economic, of including a third partner with a very different cost and wage structure. Nonetheless, two facts are clear: American owned firms have, as expected, been by far the major beneficiaries of this agreement; and production in North America, including Canada, has now been radically restructured to incorporate the advantages of integrated production. Tearing this apart would be unimaginably costly to the citizens of all three countries.

With this knowledge, the Canadian team, led by the federal government but including provinces and business and labour organizations, has diligently worked to find some solution: a revised agreement that would update and modernize the quartercentury-old arrangement and provide some accommodation of Trump’s demands short of abject surrender. Prime Minister Justin Trudeau believed that such an arrangement was close to fruition and indeed planned to meet in Washington with Trump and his Mexican counterpart to seal the deal within the time frame imposed by the Congress.

That hope was shattered by Trump’s decision to impose punitive tariffs on Canadian steel and aluminum on the bizarre pretext that these imports imperilled the national security of the United States, apparently in the view that this magical incantation could entitle the Americans to do whatever they wished. The impact will be serious although not yet fatal. Recent estimates suggest that the U.S. tariffs will cost more than 6,000 jobs in Canada — and more than 22,000 jobs in the United States. The inevitable Canadian retaliation will cost still more jobs on both sides of the border.

Now, in a post- G7 temper tantrum, Trump has threatened by tweet to impose 25-per-cent tariffs on the autos “flooding ” into the United States, presumably from Canada. He is unmoved by the facts that the trade flows both ways, much of it within American companies and produced by North American unions, and that two-thirds of the components of vehicles imported from Canada represent parts manufactured in the U.S., many of which have gone back and forth across the border a half-dozen times.

Piling these tariffs on steel and aluminum — and possibly autos — on top of the unwarranted duties on imports of lumber from Canada would be tantamount to terminating the special bilateral trading arrangement that has been so critical to Canadian, and American, prosperity over the last 50 years.

Where does this all leave us? First, we are in this mess not by accident but by design: It represents the logical outcome of Trump’s world view and his determination to dismantle the order established by his “stupid” predecessors, from Franklin Delano Roosevelt to Reagan to Obama.

Second, while the benefits of these arrangements have been reasonably balanced, in a trade war Canada would be relatively harder hit, taking roughly the same dollar impact but on a smaller economy. As the steel and aluminum example shows, more jobs would be lost in the United States but the impact would be more devastating in Canada.

Third, it is not the end of the world as we know it, so long as the multinational institutions hold firm, notably the WTO. So long as the Trump administration ultimately respects the rules of the WTO, including tariffs bound to much lower levels than prevailed when the FTA was negotiated, the Canadian economy will not suffer irreparable damage. But — and this is a very big “but” — that is by no means assured.

Trump and his acolytes seem hell-bent on returning us all to the golden age of the 1920s when America merrily embarked on a program of trade protectionism and political isolationism. Some of us, at least, remember where that all led — to the Great Depression and the Second World War.

Estimates suggest ... tariffs will cost more than 6,000 jobs in Canada — and more than 22,000 jobs in the United States.