US Elections and trade policy: What’s at stake for the US and Canada?

Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets. A podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.

Ali Jaffery: Welcome to the latest edition of Ise on the Economy podcast. I’m Ali Jaffery, executive director and senior economist at CIBC, and today I’m joined again by our chief economist, Avery Shenfeld. How’s it going, Avery?

Avery Shenfeld: It’s very good. Thanks.

Ali Jaffery: Today we’re going to talk about a paper we wrote together, along with our colleagues, Benny Towle and Catherine Judge, about the US elections and the future directions of trade policy and what it all means for the US and Canada. So, Avery, why don’t you kick off the discussion by explaining what trade policy would look like under the two candidates?

Avery Shenfeld: Well, if you take it on the surface, Trump’s trade policies are clearly protectionist. But we do have to remember that some of this is positioned as a negotiating stance rather than a final objective. For example, they talk about raising tariffs on every country to match the tariffs that those countries impose on U.S. exports. But then they say they’d use that to negotiate a fair and reciprocal trade deal that brings tariffs into line. Unfortunately, at the same time, he also talks about putting a baseline tariff, which he’s mused about being either 10% or as much as 20% on all imports to the US. And of course, that would conflict with the deal that the US signed under Trump’s first administration with Canada and Mexico. And it talks about very large tariffs purportedly something like 60% on everything that China sells to the US, I suppose, except some of the things that already have even higher tariffs. So clearly a protectionist stance as far as Harris, we’ve seen her criticized that broad application of tariffs as the equivalent to a major tax on American consumers. So it’s clear that she’s not on board with the broad use of tariffs against everybody. But that said, under Biden, the tariffs that were imposed by Trump on China continued. And Biden launched a new round of high tariffs on Chinese goods that compete with those that come under the Inflation Reduction Act. So things related to things like electric vehicles and equipment designed for renewable power, so less protectionist. But a continuation of this particularly protectionist stance when it comes to China, suggesting that some of the trade patterns we’ve seen since those tariffs imposed on China in 2017 could continue. And I’ll ask you, because you worked on this section of the paper. What have those patterns looked like? How have China and Canada fared since the trade frictions with China deepened back in 2017?

Ali Jaffery: You know, the Trump tariffs have had a fairly significant impact on global trade patterns. Bilateral trade between the US and China has weakened a lot. Unsurprisingly, China’s share in the and US imports has fallen by about 8 or 9 percentage points since 2017, and countries are shying away from investing in China, with net FDI dropping from around 4% of Chinese GDP about a decade ago to about 1% now. But that trade in FDI has been made up elsewhere, with global trade and FDI essentially being reallocated. A lot of the loss bilateral US-China trade is being rerouted through other emerging market countries, namely Mexico and Vietnam, who share U.S. imports have increased primarily on the categories that Trump put tariffs on Chinese goods. So there’s been very clear evidence of trade diversion. But these countries are also importing more from China as well. And outbound Chinese FDI into these countries has been very strong since the tariffs were put on. So essentially the tariffs has lengthened global supply chains a bit and created some separation between the US and China, with emerging market countries acting as a bit of a backdoor for trade into the US, for Canada. There have been some modest benefits from this realignment to Canada, as global trade appears to have reached a bottom, and there’s actually been a slight increase in our imports here in the US since the tariffs were imposed. And that’s mostly because we’ve done well on the categories that Trump put tariffs on Chinese goods. We haven’t benefited as much as other countries, but it’s encouraging at least that we haven’t lost ground.

Avery Shenfeld: Now we did, of course, see Trump impose some tariffs on Canadian exports that were then taken away. And particularly notable there were some tariffs put on steel exports that seemed to have an impact. What lessons did we learn from the case where those tariffs were put on Canadian steel, in terms of what happened to Canada’s export prospects in that sector?

Ali Jaffery: You know, this was interesting actually, because as you and I know, every we had a bit of debate on this and my prior was that it was a minuscule impact and credit to you that you kept at it, that it might be worth exploring. And it was, you know, we found that these tariffs likely reduced Canadian GDP by about 0.3%, or 0.6% in nominal terms, after about a year. That’s not trivial. There was a very secular decline in Canada’s exports of manufacturing metals for the duration of the tariffs were put on, and that impact could have been much worse had had gone on longer. And we saw estimates from the Bank of Canada at the time that put the impact at 0.1% on Canada’s GDP. So it ended up turning out to be about three times larger than what some people expected. Again, that’s not huge, but not trivial. And that sector accounts for about 7 or 8% of our exports to the US. Had this gone on longer, you know, the indirect impacts on employment and wages would have grown as well. So all of that goes to show you that the risk to Canada from tariffs is very clear. So I want to come back to you, Avery, and ask you why you think that a worst case outcome, you know, a scenario potentially involving up to 20% tariffs on everything we sell to the US? Why that might not be likely.

Avery Shenfeld: Well, first, there is some precedent here because Trump at one point looked like he was going to rip up the NAFTA deal with Mexico and Canada and ended up negotiating a deal that was somewhat different, was not a revolution in Canada, U.S. trade relations. Of course, he did eventually drop the tariffs as well on both steel and aluminum that he had put on. And he praised the deal that he signed with Mexico and Canada as a big win for the U.S.. But more importantly, when we look at whether the U.S. would actually go through with everything it’s saying under the Trump platform, it seems unlikely because it would entail a pretty large self-inflicted wound on the U.S. itself. For one, of course, I think that this is one criticism that Harris has levied that economists are generally in agreement on, that there would be some significant inflation impacts. So analysis by the Peterson Institute suggests that if you went with a 60% tariff on China and a 20% tariff on all other imports, it would raise the cost of living for the median American family by about 4% of after tax income. That’s certainly significant. And then, of course, you know that other countries would retaliate with tariffs on U.S. exports, and that would certainly hurt U.S. export prospects. American companies that, for example, used imported steel and aluminum showed some detrimental impacts from having to pay higher prices when those tariffs were on. And as well, it’d be difficult for the U.S. to use this as a political tool against China because, as you said, China is diversifying to export capital, equipment and components to other countries who are then exporting finished products to the U.S. and if the U.S. decided that they would close that door by imposing high tariffs on all these other emerging market countries, the US would face retaliatory tariffs from some of the fastest growing economies in the world. So a lot of self-inflicted damage, a reason to expect that, as we saw in the candidate, US-Mexico negotiations. The threat is real, but the threat may well be used to negotiate trade agreements that give America a better position while not leaving a lasting legacy of high tariffs on everything. Certainly, we can hope that, but it’s fair to say that there is a reason for Canada very concerned and watching this election. And so we too, at CBC will be watching the election and seeing how the polls unfold and what that might mean for Canada’s exporters.

Ali Jaffery: Excellent. And I think that’s a good place to stop. And I encourage our listeners to check out the note on our website, and we thank them for joining us on today’s podcast. Until next time, we’ll have our eyes on the economy and we’ll be calling it as we see it.

Outro: Please join us next time on the Eyes on the Economy where we will share our latest perspectives and outlook for the Canadian and US economy.

Disclaimer: The information and data contained herein has been obtained or derived from sources believed to be reliable, without independent verification by CIBC Capital Markets and, to the extent that such information and data is based on sources outside CIBC Capital Markets, we do not represent or warrant that any such information or data is accurate, adequate or complete. Notwithstanding anything to the contrary herein, CIBC World Markets Inc. (and/or any affiliate thereof) shall not assume any responsibility or liability of any nature in connection with any of the contents of this communication. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice. CIBC Capital Markets is a trademark brand name under which different legal entities provide different services under this umbrella brand. Products and/or services offered through CIBC Capital Markets include products and/or services offered by the Canadian Imperial Bank of Commerce and various of its subsidiaries. For more information about these legal entities, and about the products and services offered by CIBC Capital Markets, please visit www.cibccm.com. Speakers on this podcasts are not Research Analysts and this communication is not the product of any CIBC World Markets Inc. Research Department nor should it be construed as a Research Report. Speakers on this podcast do not have any actual, implied or apparent authority to act on behalf of any issuer mentioned. The commentary and opinions expressed herein are solely those of the individual(s), except where the speaker expressly states them to be the opinions of CIBC World Markets Inc. Speakers may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expect continuing analysis, views or discussion relating to these instruments discussed herein. Any information provided herein is not intended to represent an adequate basis for investors to make an informed investment decision and is subject to change without notice. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice.