Canada has already picked a losing strategy for Trump's trade war

With a newly elected left-wing Mexican president, a tariff war in full swing, and hopes fading for the ongoing NAFTA negotiations, it’s time to remind ourselves of economic and strategic issues related to free trade.

Retaliation against President Donald Trump’s tariffs is ultimately a failing strategy, especially for small countries like Canada. We might feel better defending ourselves with reciprocal tariffs, but the result is shooting ourselves in the foot.

First, let’s remember that while Canada might be the world’s 10th-largest economy, we still only account for less than two per cent of world GDP. We have little influence on world prices for anything except the one or two commodities where we control major market share, such as potash or uranium.

That means any tariff we impose hurts us without hurting others. Higher import prices increase costs to Canadian businesses and consumers. But foreign producers still enjoy the same net price, since any loss in Canadian sales is easily made up with sales to the large global market...

Large countries get to play by different rules. As a net importer with a 20-per-cent share of the global market, the U.S. could optimally impose a tariff that would force down imported prices, thereby reducing prices paid to producers in other countries. The tariff would therefore increase national income as tariff revenues and cheaper imported prices offset any economic consumer losses from displacing cheap imports. Unlike small countries, it is optimal for a large country to impose tariffs on a unilateral basis.

Trade intervention can also be good for a large exporter like China. To grab market share, China has heavily subsidized products like rare-earth metals, steel and aluminum. It can now exploit its market power by taxing exports.

Small countries like Canada are best off pursuing unilateral free trade, not by retaliating. Just because another country might wish to mess up its economy with taxes and subsidies doesn’t mean we should mess up our own.

The Trump administration has been schizophrenic in trade policy. While saying its tariffs are designed to promote reciprocal free trade, it bargains for more protective policies for the auto industry in NAFTA negotiations. This is not free trade.

Neither is Canada a pure free-trader. We impose limits on foreign ownership in banking and telecommunications. We protect dairy, egg and poultry producers, who are now each worth an average of $5 million in wealth. And we restrain log exports, lowering production costs for our forest-product producers...

This was excerpted from 12 July 2018 edition of Financial Post.