Tariff Man: Week Seven

Retaliation

In response, Canada has enacted its first round of retaliatory tariffs on a pre-announced list of U.S. products. Ottawa says it is considering additional retaliatory measures, including non-tariff options and has launched disputes proceedings at the World Trade Organization and via the USMCA system. 

 Ontario Premier Doug Ford has suggested export controls on electricity sales.  "A tariff on Canada is a tax on Americans. I will do everything, including cutting off their energy with a smile on my face. I encourage every other province to do the same," he said. 

Quebec Premier François Legault affirmed his support February 28, stating “If Mr. Trump imposes tariffs, we are not ruling out jointly implementing retaliatory measures, including restrictions on electricity exports to the United States."   According to the U.S. Energy Information Administration, electricity trade between the U.S. and Canada totaled $5 billion in 2023.

Mexico had signaled it would retaliate if Mr. Trump did not lift the tariffs by the weekend.  The 30 day suspension may give avocado buyers and beer drinkers some relief, although the action reinforces the message that the President has less a strategy than an impulse.

Potash imports, not covered by the USMCA, are to be taxed at a 10 per cent rate now, according to the revised orders, affording US farmers a modest sop as trading partners seek alternatives to the chaotic US trade regime.

The President's caprice is vexing participants, with Brooke Sutherland of Bloomberg noting  "It’s not clear if there’s actually anything that the countries or industries involved can say or do to get the levies lifted in a more permanent fashion or if they’re just doomed to live in a lingering cycle of on-again, off-again tariffs."

Exemptions: Politics and Power

The White House granted a 30-day reprieve for automakers following a joint appeal by the CEOs of GM, Ford, and Stellantis.  Vehicles and components compliant with the USMCA agreement will be exempt, for now. Citing research from a michigan consultancy, With the average new car sticker at $50,000, the tariffs could add more than $12,000 to the cost of a car.

Ross McKenzie, former managing director of Ontario’s Centre for Automotive Research, told WardsAuto that building auto and parts production capacity to replace Canadian imports will take "maybe two to three years.”

With the next U.S. midterm elections in 19 months, we may expect more compromise from the White House.  Alan Beatty of the Financial Times notes, "It’s doubtful that Trump cares much about Michigan voters for their own sake. But his decision to reprieve car companies from tariffs on Canada and Mexico clearly reflects his concern over the optics of cross-border auto production grinding to a halt."

 Additional tariffs are set to take effect on April 2

Agriculture Secretary Brooke Rollins suggested that some agricultural products are on the table for exemptions from the tariffs, such as potash and fertilizers, according to a report from Bloomberg news service.

Mr. Trump, however, seemed to reject the notion of any further tariff relief for Canada, saying in a post on Truth Social that Ottawa has not done enough to stop the flow of fentanyl across the northern border.

White House spokesperson Karoline Leavitt said that while the President is open to further exemptions to the tariffs on Canada and Mexico, there will not be any relief from the reciprocal tariffs that he plans to announce on April 2. “The reciprocal tariffs will go into effect on April 2, and he feels strongly about that no matter what, no exceptions,” she told reporters.

Leverage

Exemption authority gives Mr. Trump leverage over a broad swath of American industry, and he intends to use it. White House spokesperson Karoline Leavitt stated, "The president is open to additional exemptions. He always maintains an open dialogue and will do what he believes is right for the American people." 

In mercantilist systems, commercial success often depends on political favor rather than market efficiency - businesses seek advantage through lobbying, bribery, or loyalty to the ruling regime. In The Wealth of Nations, Adam Smith argued such policies enable those with political influence to secure favorable treatment, leading to monopolies and other privileges that hinder fair competition and broader economic welfare.:

"The interest of the dealers…in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public," he wrote 250 years ago.

Bodes Brexit Blowback?

A recent report from the Boston Federal Reserve estimates that an additional 25% tariff on Canadian and Mexican goods, combined with a 10% tariff on Chinese imports, could add up to 0.8 percentage points to core inflation (excluding food and energy). These estimates reflect first-round price effects and do not account for potential consumer and competitor adjustments.

The impact on U.S. interest rates remains obscured by the abrupt recent rise in German rates. Germany’s rate surge may strengthen the euro, compounding the impact of future U.S. tariffs on consumer prices for European goods.

Chris Giles of the Financial Times observes, "Raising prices and impeding trade by disrupting supply chains is rarely popular. Brexit, which had a similar effect, is now widely unpopular in Britain. Trump recognized public opposition to price increases during his campaign. The public is unlikely to dismiss this as a minor disturbance."