Trump Tariffs Are Making Canada Great Again

My family and I took a vacation to visit friends in the Canadian province of New Brunswick recently. New Brunswick, which is located to the northeast of Maine, is a long drive from Georgia so we took the opportunity to explore the area while we there. While we shopped at a lobster and seafood shop in the seaside village of Alma, I had an interesting conversation with the proprietor.

As we browsed, the owner asked me what I thought of Donald Trump. As I usually do, I replied noncommittally that I wasn’t a huge fan of the president.

“Well, he’s been good for us,” the Canadian shop owner replied.

He went on to explain how President Trump’s trade war had helped Canadian lobstermen. Like many farmers and fishermen, the lobstermen of Maine exported much of their catch to other countries, including China.

At least they did before the trade war. Seafood Source reported that 2018 had started as a bumper year for Maine lobster, but the implementation of tariffs quickly changed that. After China raised retaliatory tariffs on American imports, lobster shipments declined by 84 percent.

Canadian lobster exporters, unaffected by the US-China trade war, have picked up the slack. The shop owner explained that many importers who had previously bought US lobster were turning to Canada. The Canadian fishermen were benefitting both from increased volume demand for their product as well as higher prices.

While we were in Canada, the going rate for local lobster was CAD $12.99 per pound. Lobster meat was CAD $38.99 per pound. An internet price search of Maine lobster found whole lobster prices slightly lower at about $8.99 per pound (about CAD $11.80)  but lobster meat more expensive at $50-60. The higher price for US lobster meat may be due to the difficulty in finding immigrant labor. (I discussed the shortage of immigrant work visas in an article last year.)

American buyers benefitted from a favorable exchange rate in which one Canadian dollar was equal to about 75 US cents. Customers from China and other countries also benefit from the softer Canadian dollar when they buy lobster from Canadian companies. Taxes on American imports and the better exchange rate have combined to sharply boost Canadian exports.

“Our sales to China have increased dramatically this year – around 30 to 40 percent – compared to last year,” David Xu, China representative for lobster exporter ZF Max International, told Seafood Source.

Canada has also benefitted from a new free trade agreement with Europe. In 2017, Canada and the EU signed the Comprehensive Economic and Trade Agreement. One of the provisions of this treaty is that Canadian lobsters can be imported to Europe without a tariff. In contrast, European buyers must pay an eight percent tax on American lobster. US lobster shipments to Europe fell 47 percent as a result of the deal reported the Portland Press Herald. To protect themselves, many American companies are moving at least part of their operation to Canada.

Adding insult to injury for American lobstermen, Canadian lobster is often shipped through the United States to buyers in China and elsewhere. There are far more flights out of Boston and Maine than Canada’s maritime provinces so lobster that is landed and sold in Canada is often trucked to US airports where it is then flown around the world. Because the lobster came from Canada and was not sold in the US, it isn’t subject to Mr. Trump’s (or Mr. Xi’s) tariffs.

The plight of Maine’s lobstermen may not concern President Trump because most of them didn’t vote for him. In 2016, the coastal districts where the fishermen live voted for Hillary Clinton, giving her three of the state’s four electoral votes. However, the same story is being played out in American agriculture around the country, including in many red states. American farmers are losing export opportunities while foreign competitors such as Australia, Brazil, Canada, Chile, and New Zealand take over markets that were formerly dominated by the US.

Maybe those exports from the US will resume after the trade war is resolved, but maybe they won’t. Business relationships are being forged between America’s competitors and our former customers. If President Trump is re-elected then foreign customers will be leery of doing business with American companies due to the president’s habit of implementing new tariffs on short notice.

A major complaint of businesses during the Obama Administration was the unstable regulatory environment in which it was difficult to make long-term plans. That problem is worse for many businesses under President Trump. As a businessman, Donald Trump should know that business partners value reliability.

At the same time that I was on my trip, China reduced its tariffs, not on US imports but on those from competing countries. In a move calculated to further reduce American exports, China eased the import tax burden on products from countries that compete directly with American goods.

The trade war goes on and American lobstermen and farmers and manufacturers wait to see if they will be able to sell what they produce while they operate at a disadvantage in one of the world’s largest markets. In the meantime, our neighbor to the north is among the countries reaping the benefits of Donald Trump’s tariff policy.

So, if you happen to be in Canada’s maritime provinces, you can enjoy a good deal on some very fresh lobster. While you’re there, take in the beautiful scenery along the Bay of Fundy, benefit from a favorable exchange rate, and enjoy Canadian hospitality, which is a lot like Southern hospitality without the 90-degree temperatures and oppressive humidity.

And while you’re there, take just a minute to think about President Trump’s gross misunderstanding of international trade, eh?

Originally published on The Resurgent

A Funny Thing Happened On The Way To The Trade War

The tariffs designed to protect American steel and aluminum have led to lower prices. 

It has been a year since President Trump placed tariffs on imported steel and aluminum to protect American producers. Since then, the import taxes have not worked as expected. Rather than driving up the price of the metals and boosting the stock prices of the companies that produce them, prices of both aluminum and steel have declined in the past year. The same is true of the stock prices for steel and aluminum companies.

The intent behind Trump’s protective tariffs was to drive up prices. Increased costs are a feature, not a bug, of protectionism. In theory, the taxes on imports will make foreign products more expensive and allow domestic producers to raise prices and reap more profits in turn. That is not what happened.

In reality, steel prices spiked in the months after the tariffs were implemented and then crashed in late 2018 before rebounding slightly over the past couple of months. Overall, the trend has been slightly downward since the beginning of 2018.

The story is similar for aluminum prices.  There was a spike in April 2018 followed by a long decline to a current price level that is lower than pre-tariff prices.

The slump also applies to stock prices. Steel producers US Steel and Nucor both have stock prices that are far lower than their highs from last spring. The same is true of aluminum producer Alcoa.

So, what happened? The answer seems to be found in decreasing demand. As you may remember from Econ 101’s price curves, as prices go up, demand falls. Fewer goods are sold as prices rise higher.

CNN points out that expectations of rising prices and possible supply problems led to a glut of orders in 2018. This surge in demand led to the price spike last summer and helped steel companies post nice profits.

When faced with rising prices and demand, the steel producers did the logical thing. They boosted production in order to maximize their profits. Some mills reopened and others added capacity, which led to about 9,000 new steel jobs, which reportedly cost American consumers about $900,000 each. Production in the first quarter of 2019 increased by approximately 1 million tons over the same time last year.

That’s when another economic law kicked in: the law of supply and demand. The increased steel output led to another glut, this time in supply. As steel inventories piled up, prices fell drastically.

“We observe that supply exceeded demand ... over the last six months," UBS analyst Andreas Bokkenheuser said. “This explains the corresponding 25% price correction.”

There were other reasons for softening demand as well. Steel purchasers had built up their own inventories, expecting possible interruptions in supply. When those interruptions never materialized, purchasers slowed new orders while they worked through their inventories.

The Fabricators and Manufacturers Association also notes that “steel’s major end-use markets, construction and automotive, show signs of slowing compared to last year.” This softening demand may be due to the trade war’s effects on other manufacturers who use steel and aluminum as a component in their products. Other buyers are watching prices and keeping inventories lean as they prepare to place orders when the price finds a bottom.

Despite the falling prices, US steelmakers are still adding capacity. Per CNN, both US Steel and Nucor are spending billions on projects that will add a combined 2.6 million tons of production capacity in coming years. If other factors remain the same, the new capacity could drive prices even lower. Investors who would have preferred dividends and stock buy-backs voted on the investments in new capacity by selling off stocks.

With the new investments, the American companies will be more dependent on continued tariffs to protect them from foreign competition.

“We're among the lowest-cost producers. We're extremely competitive if we're operating on a level playing field. But there is massive overcapacity of steel from China, multiples of US capacity, and it's heavily subsidized by the government. That's led to a very distorted global market for steel,” said Kevin Dempsey, senior vice president of public policy for the American Iron and Steel Institute. “If we lifted the all the tariffs, I think we'd see another flood of imports.”

That is already happening. President Trump announced this week that he would lift tariffs from Canadian and Mexican imports. The US imports far more steel and aluminum from these two North American neighbors than it does from China and the rest of the world.

The bottom line is that the tariffs have failed to protect the steel and aluminum industries and, ironically, have left them more vulnerable than they were before. Steel producers invested their windfall in more capacity which will be of little use in a market with declining prices. As competition from foreign imports returns, the future of American steel and aluminum companies appears to be difficult.

 Originally published on The Resurgent

Trump To Withdraw From World's Largest Free Trade Agreement

President Trump said Saturday that he intends to use his executive authority to withdraw from the North American Free Trade Agreement. Speaking to reporters on Air Force One, Trump said that he will soon notify Canada and Mexico of the United States intent to leave the trade pact.

“I’ll be terminating it within a relatively short period of time. We get rid of NAFTA. It’s been a disaster for the United States,” Trump said, adding, “And so Congress will have a choice of the USMCA or pre-NAFTA, which worked very well.”

The Trump Administration has negotiated a new agreement, which the US refers to as the United States-Mexico-Canada Agreement (USMCA), that is intended to replace NAFTA. NAFTA is the world's largest free trade agreement and has led to dramatic economic growth in all three nations.

Trump’s intention is obviously to give Congress the choice of either the new deal or no free trade agreement at all. NAFTA reduced tariffs among the three nations so destroying the pact would have the effect of raising tariffs even further and slowing trade. Already, American agriculture, small manufacturing, and shipping have been damaged by the trade war.

The new trade pact, which is also referred to as the “New NAFTA,” has received mixed reviews. On the plus side, the deal contains increased protections for intellectual property, agrees to prevent currency manipulation, and opens American access to Canadian dairy markets. On the downside, the treaty automatically expires in 16 years unless it is renewed and, in an apparent attempt to limit US investment in Mexico, the Trump Administration insisted on limiting protection from regulatory abuse. Further, the new deal increases the percentage of domestic content required to exempt new cars from tariffs.

Rather than free trade, the Wall Street Journal says of the USMCA, “This is politically managed trade, and its economic logic is the opposite of Mr. Trump’s domestic deregulation agenda.” The paper’s editorial board added that the “auto gambit is part of the Trump-Lighthizer strategy to blow up global supply chains.”

The main attraction of the Trump trade pact is that it is better than a reversion to pre-NAFTA rules with their return to increased tariffs and regulations. Economists say that the new deal won’t boost economic growth or increase manufacturing jobs. Its new limitations on free trade will end up costing American consumers more money while giving them less choice.

There is also debate on whether President Trump has the authority to unilaterally withdraw from NAFTA. The treaty includes a provision that allows for withdrawal after a six-month notice, but opponents say that since NAFTA was approved by the Senate, leaving the pact would also require Senate approval.

A 2016 report by the Congressional Research Service addressed the question of a unilateral withdrawal from NAFTA by the president. “As a practical matter, the President’s communication of a notice of termination of an FTA [free trade agreement] to trade partners in accordance with the FTA’s terms59 appears sufficient to release the United States from its international obligations,” the report says, but  notes, the “President could not repeal federal statutes implementing the FTA in the absence of congressional action because the Constitution gives Congress the authority to impose duties and to ‘regulate commerce with foreign nations.’” In other words, the president’s notice to terminate could be a withdrawal in name only if Congress does not change the US laws and regulations to differ from what the treaty requires.

The report also points out that “the Constitution apportions authority over international trade between the President and Congress.” The legality of Trump’s move is not specifically addressed in the Constitution and there is no precedent for a president unilaterally withdrawing from a trade treaty.

If President Trump goes through with his move to unilaterally claim the executive authority to withdraw the United States from a successful trade deal with its two largest trading partners, it will almost certainly provoke a constitutional crisis as well as an economic one. The Senate is controlled by Republicans but many oppose the president’s protectionist trade policies. Republican Senate leaders may be forced to sue to overturn the president’s abuse of executive authority or choose between either a badly flawed trade deal or no deal at all.

Originally published on The Resurgent

A Tale of Two Treaties

The United States and China are taking a very different approach to international trade. President Trump is intent on renegotiating or canceling American trade treaties such as NAFTA while the Chinese are creating a broad new trade alliance in Asia that excludes the United States.

One of President Trump’s first official acts was to withdraw the United States from the Trans-Pacific Partnership negotiated by the Obama Administration. Trump’s act, which fulfilled a campaign promise, shattered the trade agreement and allowed China to pick up the pieces.

In November 2017, less than a year after Trump’s order withdrawing from the TPP, a summit was held in Manila to negotiate an alternative, the Regional Comprehensive Economic Partnership or RCEP. Talks progressed quickly and the 16 nations are expected to sign an agreement at a November 2018 summit in Singapore. The White House announced this week that President Trump would skip the meeting as well as the Asia Pacific Economic Cooperation forum in Papua New Guinea.

The RCEP includes many of the same Asian nations that would have participated in the TPP. These include Australia, Brunei, Japan, Malaysia, New Zealand, and Vietnam. In addition, it adds a host of others such as Cambodia, India, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, South Korea, and Thailand. The biggest addition to the TPP countries is China.

With the country in a growing trade war with the United States, participation in the RCEP gives China an opportunity to find new markets for exports that would have been sold to the US. President Trump’s tariffs on Chinese goods can be at least partially offset by the free trade agreement that encompasses a large swath of Asia and the Pacific.

President Trump is taking a different approach. The president recently threatened once again to withdraw from NAFTA if he cannot get a “fair deal” from Mexico and Canada. In a Sept. 1 tweet, Trump said that there was “no political necessity to keep Canada in the new NAFTA deal” and added, “Congress should not interfere w/ these negotiations or I will simply terminate NAFTA entirely & we will be far better off….”

Last week, the US and Mexico reached a preliminary agreement on a new trade deal, but negotiations with Canada appear to have stalled. Mr. Trump sent a letter to Congress on Friday announcing his intention to sign a deal with Mexico in the next 90 days. The timeline would allow an agreement to be signed before Andres Manuel Lopez Obrador, Mexico's new left-wing president takes office on Dec. 1.

The Trump Administration is also under pressure to show results before the midterm elections in November. Showing that the Trump approach to trade deals yields results would provide a boost to beleaguered Republican candidates and help to stem chances of a blue wave.

“With goodwill and flexibility on all sides, we can get there,” Canadian Foreign Affairs Minister Chrystia Freeland said. “For Canada, the focus is on getting a good deal and once we have a good deal for Canada, we'll be done.”

The end of President Trump’s tweet shows the fundamental difference between the Trump approach and the Chinese approach. The president, who last month tweeted that “tariffs are the greatest,” seems to see international trade as more of a threat to the US economy than an opportunity for growth. On the other hand, China sees the opportunity to expand international markets as a way to both bring wealth back home and grow Chinese influence around the world.

The irony is that Donald Trump does not see that his retreat from the world, his building of both literal and figurative walls between America and the rest of the world, does not make America great again. To the contrary, Trump’s trade policies not only hurt American companies and consumers, it also diminishes American influence around the world. That is apparent in the new Asian trade deal that will be written for China’s benefit instead of America’s.

Originally published on The Resurgent

No, The Canadians Did Not Burn The White House

In yet another example of the surreal nature of the Trump Administration, a misunderstanding of the War of 1812 was reportedly used by the president to justify his tariffs on Canada. A 200-year-old incident came up in a conversation with the Canadian prime minister last month prior to President Trump’s imposition of tariffs on several allied nations.

According to a report from CNN, the moment came in a May 25 phone call with Canadian Prime Minister Justin Trudeau in which the two leaders were discussing Trump’s new policy targeting Canadian imports of steel and aluminum. Per CNN’s sources, Trudeau asked Trump how he could justify applying tariffs, which US law permits the president to do for reasons of national security.

“Didn't you guys burn down the White House?” Trump is reported to have replied.

Umm, no. As a matter of fact, they didn’t.

The only time that the White House has burned was in 1814 during the War of 1812. The burning was carried out by British redcoats, not Canadians. In fact, Canada would not exist as an independent country until 1867, some 50 years later.

The War of 1812 began, appropriately enough, in 1812. The cause of the war was the British policy of “impressing” American sailors. British ships would stop American ships on the high seas and kidnap sailors, forcing them to serve in the Royal Navy.

War hawks in the US were anxious to annex the British colonies in present-day Canada, also the subject of a failed campaign in the American Revolution. President James Madison approved a three-pronged assault on our neighbor to the north and the invasion got underway in July 1812. The three assaults quickly failed and American forces lost Detroit and Fort Dearborn, present-day Chicago, in the process.

The following year, the Americans tried again. This time, the American army burned the British fleet on Lake Erie, recaptured Detroit and conquered York, Ontario, burning several government buildings there. Eventually, the US Army was forced to retreat after a failed campaign against Montreal.

By 1814, the end of the Napoleonic wars in Europe allowed the British to send reinforcements to North America. A British invasion of the United States reached Washington, D.C. where the redcoats burned the White House as a reprisal for the American burning of York the previous year.

Since 1814, American have fought alongside British and Canadian troops in several conflicts. The three nations were primary members of the coalition that defeated Germany in World War I and again with  Japan in World War II. They stood together against the North Koreans and Red Chinese in the Korean War. Both Canada and the United Kingdom also came to America’s aid after the September 11 attacks. Both countries supplied troops to aid in the invasions of Afghanistan in 2001 and Iraq in 2003.

Given the long, peaceful relationship between the United States and Canada, it is absurd to consider the nation a national security threat based on events 200 years ago. This is especially true since Canada did not even exist as a country at that point.

It is unlikely that President Trump really wanted to use his tariffs as a retaliation for the burning of the White House. It is far more likely that he used the burning of the White House to justify tariffs that he wanted to implement for other reasons.

In April, Canada promised to address Trump’s claims that Chinese steel was being dumped in the US after being shipped to Canada. Even after this concession, the Trump Administration imposed the tariffs.

President Trump’s decision to impose national security tariffs is reminiscent of President Obama overstepping his legal authority. Section 232 of the Trade Expansion Act of 1962 permits the president to impose tariffs against imports that threaten national security, but it is a stretch to claim that Canadian imports do so. Instead, Trump seems to be using the tariffs as a negotiating ploy to try to rewrite NAFTA.

If President Trump gets an “F” for history, he also deserves a “D” for economics. The hefty tariffs that he imposes on steel and other products will not be paid by foreign countries or corporations. Like any tax, tariffs are paid by the end consumer. In the case of Trump’s tariffs, that is American citizens and businesses.

Originally published on The Resurgent

Trump trade war starts tomorrow

Commerce Secretary Wilbur Ross announced that the US will impose tariffs on steel and aluminum products from Canada, Mexico and the European Union starting on Friday. The close US allies had previously been given exemptions from the tariffs that the president imposed on other countries last March.  

All three trading partners vowed to impose retaliatory tariffs on the US in return. The Wall Street Journal reports that the European Union has prepared a list of $7.5 billion worth of US exports that could begin to be subject to increased tariffs on June 20. Mexico said that it will target US products “up to an amount comparable to the level of damage” that US tariffs inflict on Mexican exports. Canada did not make a specific statement, but had previously vowed to retaliate if the Trump Administration imposed new tariffs.

Canada and Mexico are parties to the North American Free Trade Agreement (NAFTA) with the US, which eliminated tariffs on much trade between the three countries. They were exempted from the earlier tariffs as negotiations to revise NAFTA proceeded. It is uncertain how the new tariffs will affect the trade pact.

“Those talks have been taking longer than we had hoped,” Secretary Ross told reporters.

The EU also had a temporary exemption as trade representatives tried to reach a permanent agreement. “We continue to be quite willing and indeed eager to have further discussions with all of those parties,” Ross said.

Additional tariffs on China are slated to go into effect next month. The Trump Administration called a truce to the Chinese trade war in May, but then announced it would proceed with the tariffs. The Chinese government has also vowed to retaliate.

The new tariffs on Canada, Mexico and Europe have the potential to be much more damaging to the US economy than the previous round of tariffs. Canada and Mexico rank first and third respectively in steel exports to the US. The two countries send more steel to the US than the rest of the top five countries combined.

Canada and Mexico also rank second and third, just behind China, as America’s top trading partners. Four European countries, Germany, the United Kingdom, France and Italy, are also among the top ten trading partners.

The trade war is already expanding beyond the steel and aluminum industries that Trump originally set out to protect. The Washington Post reports that European retaliatory tariffs include products as varied as Kentucky bourbon and Harley Davidson motorcycles. Mexican duties will be imposed US pork bellies, blueberries, apples, grapes, cheeses and steel.

If the tariffs go into effect, the result could be a slowing economy in the months prior to the midterm elections. This could give Democrats a desperately needed issue with which to attack Republicans. If trade becomes an issue in the election with Democrats embracing free trade and Republicans defending big government tariffs, politics will have officially turned upside-down.

Originally published on The Resurgent

Oh, Canada! Trudeau Says He Won't Accept Bad Deal On NAFTA

Canadian Prime Minister Justin Trudeau pushed back at Trump Administration attempts to rewrite the North American Free Trade Agreement on Wednesday. Speaking at the University of Chicago’s Institute of Politics, Trudeau said that “no deal” might be more preferable to Canada than a deal that is revised along the lines that the Trump Administration proposes.

“We will not be pushed into accepting any old deal, and no deal might very well be better for Canada than a bad deal,” Trudeau said.

Trudeau’s comments came in the course of a podcast, “The Axe Files,” produced by the University of Chicago and CNN. Trudeau said that Canada valued trade with the United States, but would not accept a one-sided deal.

“When Canadians see me engaging constructively, collaboratively -- but firmly -- at the negotiating table on NAFTA, saying, 'Look we know there are ways to modernize and improve NAFTA in ways that will create a win-win-win when we include Mexico,' there is a path absolutely for that. But we are not going to take a win-loss just for the sake of getting a deal,” Trudeau said.

He added, “We know we can work towards a good deal. But we also know that we will not be pushed into accepting any old deal, and no deal might very well be better for Canada than a bad deal. And being firm on that is, I think, what Canadians expect of me.”

During the campaign, President Trump called NAFTA “the worst trade deal in the history of this country” even though many economists say the trade pact with Mexico and Canada has benefitted all three countries.

Canada and Mexico are able to drive a hard bargain at the NAFTA negotiations because they have other options. Both countries recently signed onto the new Trans Pacific Trade pact that will not include the United States. If the three nations cannot agree to continue NAFTA, Mexico and Canada will have free trade access to numerous new markets around the Pacific rim. Mexico already has 10 free trade agreements with 45 countries.

Still, Trudeau emphasized that continuing the deal would be beneficial to both countries. “Frankly, there is no country in the world that has a greater vested interest in the United States being successful than Canada," he said. "You know, when you sneeze, we catch a cold. I mean, we're so interlinked that absolutely we want to make sure it's a good deal for the United States, because that's part of making a good deal for Canada.”

Trudeau also addressed his recent controversial correction of an audience member who used the word “mankind.” In a clip that has been widely mocked, Trudeau said that “peoplekind” was the appropriate gender-neutral phraseology. Fox News reports that the prime minister called the comment “a dumb joke.”

Originally published on The Resurgent