What kind of game is Trump playing with Canada?

Editor’s note: A version of this post was originally published at my Patreon account on 6 Jun

The latest news out of the White House is from Larry Kudlow touting the likelihood of ending NAFTA and negotiating with Mexico and Canada on a bilateral basis. I have long felt this was the endgame on NAFTA and that Canada was the country to watch on trade.

Canada is a stalking horse

Back in February, I was talking about this during an appearance on CBC’s On The Money program. I posted in the aftermath of that media appearance. Here’s the link.  What’s most relevant is this part:

US President Trump has said he favors bilateral trade agreements. But, so far he has relented and decided to re-negotiate NAFTA on a trilateral basis. If the trilateral talks fail, two-party negotiations could carve out specific sticking points that would allow a re-booted NAFTA to move forward.

However, advocates of a bilateral deal between Canada and the US are emerging, as Americans find trade with Mexico more contentious. US Trade Representative (USTR) Robert Lighthizer may be one. We will have to see how Lighthizer responds in Mexico City. Inflexibility on his part may be a way of abandoning a trilateral agreement as too difficult and moving to bilateral negotiation.

So you have to ask what kind of game is Trump playing here. It could be that he’s been using Canada as a whipping boy to stir up fears in Mexico and China. Maybe he just wants to get concessions out of the Chinese and the Mexicans and he is willing to take heat on (temporarily) damaging relationships with the Canadians. I suspect this may be what he is after.

Europe tells you this is small potatoes

Now Trump is also going after other allies in Europe with tariffs. And the EU has responded in kind. Here’s their statement. Notice the euro amounts at issue here:

Following today’s decision to apply additional duties to selected imports from the United States, the Commission expects to conclude the relevant procedure in coordination with Member States before the end of June so that the new duties start applying in July.

The application of the rebalancing duties is fully in line with WTO rules, and corresponds to a list of products previously notified to the WTO. The WTO Safeguards Agreement allows for a rebalancing corresponding to the damage caused by the US measures with EU exports worth €6.4 billion (2017) being affected. The EU will therefore exercise its rights immediately on US products valued at up to €2.8 billion of trade. The remaining rebalancing on trade valued at €3.6 billion will take place at a later stage – in three years’ time or after a positive finding in WTO dispute settlement if that should come sooner.

Commissioner for Trade Cecilia Malmström said: “This is a measured and proportionate response to the unilateral and illegal decision taken by the United States to impose tariffs on European steel and aluminium exports. What’s more, the EU’s reaction is fully in line with international trade law. We regret that the United States left us with no other option than to safeguard EU interests.”

This isn’t a lot of money frankly. The fact is tariffs or a trade war is not going to be a driving factor economically. The worry — the way I expressed it last week is — “a trade war could be the veritable straw that broke the camel’s back”. In and of themselves, these measures are small potatoes.

Expect politics to dominate discourse

So economics and the economy and economic policy is going to go a bit stealth here. The tariff debate and issues like the US Ambassador to Germany allegedly meddling in European politics is driving headlines. This talk is even displacing Italy in some venues. In the US, Trump has sucked all the air out of the room. Everyone is talking about him and kneeling at the national anthem and Russian collusion. How the economy is doing is taking a backseat.

But the economy in the US is doing well. And so, I believe the headline numbers are so good the Fed will feel forced to react. And this means we are in the midst of a more aggressive hiking campaign by the Fed than is commonly appreciated. For now, trade is just a sideshow. Yes, it may end up being the last straw. But it’s not a major driver economically.