Why Is Trump Risking a Trade War With Canada?

Why Is Trump Risking a Trade War With Canada?
The president has softened some of his tough talk toward China and Mexico, transferring it to Canada and disputes over softwood lumber and dairy products.

DAVID A. GRAHAM

https://www.theatlantic.com/international/archive/2017/04/why-is-trump-starting-a-trade-war-with-canada/524265/

Donald Trump is not the first U.S. president to tangle with Canada over lumber. In fact, the first U.S. president to do so was the first U.S. president. George Washington’s administration saw a dispute over ownership of valuable forests on the border between New Brunswick and present-day Maine.

So despite Trump’s recent tough talk about the trade relationship with America’s neighbor to the north, his announcement Tuesday morning of new tariffs on Canadian lumber is actually consistent with what U.S. policy has been for decades. Where Trump differs from previous presidents, though, is in very publicly sounding off about a longstanding disagreement. In so doing he has also, apparently, found a new target for his trade-related ire, even as he softens his stances toward previous targets like China and Mexico.

“We’re going to be putting a 20 percent tax on softwood lumber coming in—tariff on softwood coming into the United States from Canada,” Trump said Tuesday morning. Actually, the Commerce Department is levying tariffs on a range of Canadian lumber companies, with the average coming to around 20 percent.

It’s not just wood that’s at issue. Tuesday morning, Trump tweeted:

Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!

— Donald J. Trump (@realDonaldTrump) April 25, 2017

He’d previously complained about the dairy issue during an appearance in Wisconsin. Also Tuesday, Commerce Secretary Wilbur Ross issued a statement attacking Canada:

It has been a bad week for U.S.-Canada trade relations. 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 functioning Free Trade Agreement.
Both the lumber and dairy issues are enduring matters of dispute between the U.S. and Canada, though for slightly different reasons.

The Canadian lumber industry functions differently from that of the United States. In the U.S., most logging is done by private companies on privately owned land. The Canadian timber industry operates largely on public lands, with companies paying a fee to harvest. U.S. logging companies charge that this constitutes an unfair government subsidy, allowing Canadian producers to flood the American market with cheaply produced softwood (from fir, spruce, pine, and other coniferous trees).

Every few years this dispute flares up, and then the Canadian and U.S. governments reach an agreement—often under pressure from American builders, who are upset about paying higher costs for wood—that sets some sort of quota on imports to the U.S. to appease all parties. The latest agreement, signed in 2006, expired in 2015, leading inexorably to Tuesday’s declaration. Bloomberg reported that some Canadian lumber officials, while disputing the U.S. charges, actually viewed the tariffs as less onerous than might have been expected.

“This is so predictable,” says Laura Dawson, director of the Canada Institute at the Wilson Center. “It’s like the Mayan calendar: 100 years of good harvest and then 10 years of chaos and darkness.”

The dairy dispute, meanwhile, centers on Canada’s staunchly protectionist approach to the industry. The Canadian dairy industry is largely quarantined—neither exporting nor importing milk products. In recent years, American producers found a loophole allowing them to export to Canada new products not covered by existing rules, but Canada has now moved to close that off. Canada’s reason is simple enough: It’s politically popular to support Canadian dairy farmers. The reason Trump is complaining is that it’s also politically popular to support American dairy farmers. (This is true across party lines: Democratic Senate Leader Chuck Schumer is praising Trump on the milk issue; then-President Obama privately pressed Prime Minister Justin Trudeau on the same matter when he was in office.)

These long-running irritants in the U.S.-Canadian trade relationship have not typically gotten in the way of broader trade between the two countries: Canada is the largest importer of American goods, and it’s the fourth-largest source of imports to the United States. But because of the disagreements over dairy and lumber, they are excluded from NAFTA, which eliminates trade barriers between the U.S., Canada, and Mexico on most products.

Historically, the U.S. and Canada have worked their way through disputes over the two products. But the question is whether Trump, having followed past administrations’ lead on adding tariffs, will also follow them on breaking the impasse. If the Canadians hoped that Donald Trump, with his past as a builder, would be more likely to offer a good deal on softwood lumber than the Obama administration, they may be sorely disappointed now.
Trump has sent mixed messages about U.S. trade over its northern border in general. “People don’t realize Canada’s been very rough on the United States,” he said Tuesday. “Everyone thinks of Canada being wonderful and civil. I love Canada. But they’ve outsmarted our politicians for many years, and you people understand that.” But Trump seemed to get along well with Trudeau when the two met in February, and he was very eager to restart construction on the Keystone XL pipeline, a major Canadian priority Obama had tried to kill. (Trump and Trudeau spoke on Tuesday, though a White House readout shed little light on the call, except that they discussed wood and dairy and that “it was a very amicable call.”)

“You’re trying to find a pattern, and it’s really difficult to say whether we should expect that there would be a pattern in the way that this White House behaves in its foreign relations,” Dawson said. “I think it’s going to go more or less the way it has gone in previous negotiations. The things that are more worrying here are the leakage between the issues that are known to be systemic irritants and the broader trading relationship. We all know that we’re not going to get along on softwood, but that’s not a reason to blow up the NAFTA.”

Whether the Trump administration will feel the same way remains to be seen. It has been slow to begin formal renegotiation of NAFTA—a process about which Canada has been outwardly supportive—but says it remains committed to the process. The U.S. is effectively asking Canada to hobble its dairy and timber industries, but it’s unlikely Trump would make any concessions on Canadian priorities, like dropping “buy American” provisions and opening up labor markets to Canadian workers. A drawn-out trade war between Canada and the U.S. would harm U.S. exporters and increase some prices for American consumers, but it would likely hurt Canada more, since trade with the U.S. represents a larger percentage of Canadian GDP than trade with Canada represents for the U.S.

But Canada is aware of this and has begun trying to diversify, as a government Twitter account pointedly noted Tuesday:

Asia is a growing market for Canadian #softwoodlumber: pic.twitter.com/jmpNU2bplR

— Canada Trade (@CanadaTrade) April 25, 2017

Canada is now pursuing closer trade relationships with China and other Asian markets. Ironically, the Trans-Pacific Partnership negotiated under Obama would have opened up the Canadian dairy market to American exports, but Trump withdrew the U.S. from that agreement.

Although the lumber and dairy disputes are not new, Trump’s very public excoriation of Ottawa is unusual. It’s especially remarkable because his attacks on the closest American trade partner come as he has softened his line on two of the countries he has most aggressively criticized in the past. During the presidential campaign, he accused Mexican and Chinese leaders of outsmarting the U.S. in negotiation, and vowed to take a tougher line with them. Instead, he has blinked on demanding funding for his border wall and softened his language toward China, recognizing both that Beijing has not devalued its currency for years and that he needs Chinese assistance to contain North Korea.

Meanwhile he has transferred his complaints about those countries over to Canada, right down to the “outsmarted” terminology. The current approach is a nearly perfect embodiment of the old maxim that one should keep one’s friends close and one’s enemies closer—give or take the closeness with friends.