Trade War

Wal­let-friendly tips for avoid­ing col­lat­eral dam­age

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THE TAR­IFF WARS HAVE BE­GUN. Ef­fec­tive July 1, Canada im­posed hun­dreds of du­ties on Amer­i­can prod­ucts as re­tal­i­a­tion for Amer­i­can tar­iffs on alu­minum and steel from Canada. The con­cept is to hit U.S. ex­porters send­ing goods to Canada with costs that match the hit Cana­dian ex­porters are tak­ing when they send prod­ucts to the U.S.

For con­sumers in Canada, the new tar­iffs are a maze of triv­ial charges on such things as li­corice, candy and tof­fee, non-frozen or­ange juice, may­on­naise, salad dress­ing, soups and broths, ketchup, shav­ing cream, bob­bins and spools, thin sheets of ply­wood and au­to­matic dish­washer de­ter­gent. Canada is hit­ting back with tar­iffs on 229 goods. Many tar­iffs are fo­cused on goods from states that voted for Pres­i­dent Trump in 2016, e.g., bour­bon from Ken­tucky, which is the home of Se­nate ma­jor­ity leader and Re­pub­li­can émi­nence grise Mitch McCon­nell, and dairy prod­ucts from speaker of the House Paul Ryan’s home of Wis­con­sin.

There are two kinds of prod­ucts on the list tar­get­ing Canada – in­dus­trial in­puts like var­i­ous kinds of steel and pipe that will be sub­ject to a 25 per cent duty and con­sumer goods to be hit with 10 per cent du­ties. The list has ob­scure stuff most peo­ple have never heard of like sil­ico-man­ganese steel. Nev­er­the­less, a few things, such as sheet steel for cars, if charged with the 25 per cent levy on sheet steel, would be dev­as­tat­ing. The tar­iffs, if ap­plied, could cas­cade to even higher costs, de­pend­ing how the ac­count­ing is done. Wags are call­ing it“s ar­maged­don ,” and it surely is. Jerry Dias, pres­i­dent of Uni­for, which rep­re­sents thou­sands of auto work­ers, said in Par­lia­men­tary hear­ings

on June 26, “There is not an as­sem­bly plant in Canada that will sur­vive a 25 per cent tar­iff be­cause al­most ev­ery­thing we build goes to the United States.”

The trade spat is pol­i­tics and old pol­i­tics at that. But, first, a word of ex­pla­na­tion. Though tar­geted to have an ex­pected harm on a coun­try or in­dus­try, tar­iffs usu­ally do not work well. In­deed, as we’ll see, they tend to have the ef­fect of hurt­ing the coun­try im­pos­ing the tar­iffs as much or more than the tar­get of the tar­iffs.

If Coun­try A – the U.S., of course – adds tar­iffs to, say, steel (as the U.S. has done to Cana­dian rolled and sheet metal) and the prod­uct is widely used, as steel is and alu­minum is, costs of pro­duc­tion rise, driv­ing up Coun­try A’s cost of liv­ing. The cen­tral bank, in this case, the Fed­eral Re­serve Board, sees in­fla­tion ris­ing and raises in­ter­est rates to counter it. For­eign in­vestors and large for­eign banks see higher rates and buy Amer­i­can dol­lars to park their cash. Buy­ing U.S. dol­lars by the bil­lions, for this is the daily vol­ume of for­eign cur­rency mar­kets, drives up the price of the U.S. dol­lar in terms of other cur­ren­cies and then makes U.S. prod­ucts more ex­pen­sive. So the U.S. mar­kets sup­pos­edly pro­tected by tar­iffs on Round 1 soon find that goods are harder to ex­port. Sales fall.

The coun­try hit by tar­iffs, Coun­try B – Canada – finds its global sales fall­ing. The Bank of Canada sees a re­duc­tion of in­fla­tion and so cuts in­ter­est rates. Less for­eign money flows to Canada. Our dol­lar de­clines in in­ter­na­tional value. Our goods are now cheaper in for­eign dol­lar terms. We sell more.

None of this is news. What is news is that the United States has started the kind of trade war prac­tised two cen­turies ago. The con­cept of rais­ing a tax wall against the world to pro­tect the mother coun­try, a the­ory known as mer­can­til­ism, which had been

in fash­ion since be­fore the reign of El­iz­a­beth I in the 16th cen­tury, be­came dis­cred­ited when Bri­tain be­came a great man­u­fac­tur­ing cen­tre. Bri­tain be­gan to cut its tar­iffs start­ing in the early 19th cen­tury af­ter Napoleon was dis­patched to ex­ile and it no longer needed pro­tec­tion. Tar­iffs were in dis­re­pute af­ter the world wars. Be­gin­ning in the 1950s, Europe and much of the world moved to re­duce and then elim­i­nate thou­sands of tar­iffs. Trump is bring­ing them back for po­lit­i­cal rea­sons.

Econ­o­mists long ago proved the ob­vi­ous: when slapped by ev­ery coun­try against ev­ery other coun­try, tar­iffs wind up do­ing no good. They sup­pos­edly shift pur­chas­ing power to the gov­ern­ments that levy them, but when they work, they re­duce trade and there­fore have lit­tle ben­e­fit for the trea­suries of the coun­tries sup­pos­edly pro­tected. They do tend to shrivel out­put and wind up cut­ting gross do­mes­tic prod­uct, GDP, which is the sum of ev­ery­thing made in a na­tion. Tar­iffs are de­fla­tion­ary, for they di­vert spend­ing power to gov­ern­ment tax col­lec­tors and cas­cade from the gro­cery store where they make prod­ucts more ex­pen­sive to the res­tau­rants that serve them fur­ther marked up by op­er­at­ing costs and sales taxes. Those who must pay lose. Those who whee­dle them down or clev­erly evade them may win.

Now du­ties are back with a vengeance. And that is the right word, for Pres­i­dent Trump has com­plained of “un­fair” treat­ment by Canada, and Canada, which re­ally has no other choice, is re­tal­i­at­ing. Other coun­tries in­clud­ing China, also hit with fresh Amer­i­can tar­iffs, are do­ing the same po­lit­i­cally fo­cused trade tax­a­tion. Note that only new goods en­ter­ing Canada af­ter July 1 are af­fected. Stuff al­ready here may be repriced – liquor boards tend to do that – but goods such as used cars have their pre-tar­iff prices baked in and are heav­ily dis­counted from new car costs. Beg­gar-thy-neigh­bour trade taxes have made loop­holes and, for the as­tute buyer, there are many ways out.

Du­ties on con­sumer goods are of­ten avoid­able by shop­ping for goods made in places other than the U.S. or by do­ing stuff your­self such as mak­ing your own soup or some­times by just read­ing the la­bel to see where stuff is from. The U.S., it should be noted, has de­manded coun­try of ori­gin la­belling to dis­cour­age shop­pers from buy­ing sup­pos­edly in­fe­rior non-U.S.-ori­gin food prod­ucts. Now that may come back to haunt them.

Many things are not be­ing hit with im­port du­ties. Ser­vices, for ex­am­ple, are not on the list. Try­ing to tax ad­vice from U.S. lawyers or ac­coun­tants ad­vis­ing Cana­dian


com­pa­nies would be fu­tile. No­body knows how to beat a tax bet­ter than those peo­ple, af­ter all. And in­tel­lec­tual ser­vices such as com­puter man­age­ment or de­vel­op­ing soft­ware code that may op­er­ate in the cloud, which is no place in par­tic­u­lar, can­not be hit with na­tional-source du­ties. But many goods are on the list of tar­gets. We of­fer, here­with, a se­lec­tion of prod­ucts socked with tar­iffs by the Gov­ern­ment of Canada ef­fec­tive July 1 and ways to avoid pay­ing higher prices. The list can be found at­l­list-of-229-us-prod­ucts-tar­geted-by­canadas-re­tal­iary-tar­iffs.

Steel coils in a yard at ArcelorMit­tal Do­fasco steel plant in Hamil­ton

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