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Tariffs: The World Retaliates

After initially promising to honour existing trade agreements with ally countries, the US government did an about-face yesterday, announcing that the 10% aluminum and 25% steel tariffs meant to punish China would also be applied to the European Union, Mexico, and Canada.  Almost immediately, the affected governments announced their own set of retaliatory measures.  It is almost certain that allied countries had been expecting that these measures would become necessary, given the US administration's demonstrated tendency to go back on previous policy statements.  The statements made by government leaders appear to back this up, emphasizing that the highly detailed retaliatory measures were "carefully considered".

Below are how these major trade partners have responded to the US government's about-face on tariffs.

European Union and United Kingdom

Both the EU and the UK responded quickly with a prepared statement and 10-page list of retaliatory tariffs.  The EU said it had no choice but to defend itself, while the UK stated that the country expects to be "permanently and fully exempt" from US tariffs on steel and aluminum.  Given that the UK government is in the process of withdrawing from the European Union, these new tariffs come at a potentially devastating time, and could foment opposition to Brexit.  Previously, the UK government had been hoping that favourable trade treaties with the United States would mitigate the loss of access to the European common market, but now the pursuit of Brexit may seem increasingly like an ill-conceived venture that leaves the UK overly dependent upon unreliable allies.

The EU's retaliatory tariffs are broad, covering many common food products, alcohol, cigarettes and tobacco, clothing and other cotton items, appliances, paper products, as well as boats and motorcycles.  The value of these tariffs is estimate to be over $3.3 billion.

Mexico

The country's southern neighbour struck probably the most conciliatory tone, saying that it is open to dialogue to solve the problem, but in the meantime will impose duties on flat steel, lamps, pork products, sausage, various fruits, and cheeses.  The Mexican government also noted that it may add further products to the list of retaliatory tariffs, but it committed to international trade and "rejection of unilateral protectionist measures".  For now, the tariffs are valued at around $2.8 billion.

Canada

The United States' largest trading partner stands to be hit hardest in the immediate aftermath of this announcement, and it is the Canadian response which has elicited the most interest from observers.  At a terse press conference, Prime Minister Justin Trudeau announced dollar-for-dollar retaliatory tariffs before concluding with with what sounded more like he was talking to an autocratic dictatorship targeted by international sanctions than a steadfast trading partner of more than a century: 

I want to be very clear about one thing: Americans remain our partners, friends, and allies. This is not about the American people. We have to believe that at some point their common sense will prevail.  But we see no sign of that in this action today by the US administration.
— Prime Minister Justin Trudeau

Foreign Affairs Minister Chrystia Freeland also decried the tariffs as a "specious and unprecedented use of" national security protection measures in existing trade agreements, promising to take Canada's case before both NAFTA and the WTO for dispute resolution.

The Canadian retaliatory tariffs include steel and aluminum, but also other products like beef and chicken foodstuffs, many grocery items, maple products, household sundries, paper products, boats, and many types of alcohol including whiskey.

Canada is in a delicate position in negotiating a resolution to this crisis, but it is not without significant leverage brought about by the deeply interconnected nature of the Canadian and US economies.  An overwhelming supermajority of Canadian steel exports - 87% - are destined for the United States, making a 25% tariff potentially crippling to the industry.  However, Canada is also the United States' main steel trading partner, with 17% of all US steel imports coming from Canada (the highest of any country), and 50% of all steel exports going to Canada.  Furthermore, Canada is the largest trading partner for 32 US states, and the second largest for the other 18.

Retaliatory tariffs from Canada alone will cost US consumers and businesses over $12.8 billion, and threaten the US trade surplus with its neighbour to the north.  More importantly, it could fuel domestic critics of the country's free trade deal with the US, many of whom have been arguing since the original deal was inked in 1988 that it gave disproportionate advantages to the United States.  While the country has been increasingly looking to make other trade deals in recent years, the new tariffs may be the incentive that Canada needs to finally truly diversify its international trade partners, a shift which could be very difficult to reverse.

Future outlook

Steel and aluminum stocks rose on news of the new tariffs, but effects will be felt beyond these industries, and into the broader economy.  Many of the new tariffs will apply to products that will hit Trump's political base particularly hard, including agricultural goods from politically important regions, Florida orange juice, and whiskey produced by Senate Majority Leader Mitch McConnell's home state.  Conversely, US capacity for steel and aluminum production is unlikely to be able to meet domestic demand, meaning that many US buyers of foreign steel and aluminum may continue to buy the same goods, but at higher prices.

Leaders from the G-7 countries will be meeting face-to-face in Charlevoix Québec, Canada next week, giving the countries affected by these tariffs an opportunity to speak with representatives of the United States in person.  While the United States has isolated itself with this move, the formerly close allies who have been affected by it can be expected to co-ordinate and carefully plan their responses.  As French Finance Minister Bruno Le Maire put it, "we will be divided - it will not be a G-7, it will be a G-6 plus one".