T
rade relations between the United States and Canada have been deteriorating sharply following failed talks and 50% tariffs imposed on Canadian goods and retaliation threats from the latter. The collapse in the trade negotiations was following several days of discussions and previous indication of nearness of reaching an agreement.
The tariffs imposed by the American government cover $20 billion worth of imports from Canada, and Canadian PM Mark Carney has pledged similar retaliatory tariffs on products from America. This development shows deterioration of economic relations between America and Canada.
This current crisis followed failure to reach an agreement for trade before expiry of deadline on tariffs that America plans to impose. The negotiations were ongoing with an aim to settle disagreements on such trade barriers as those related to steel, aluminium, autos, dairy products and many more.
The United States government previously announced postponement of these tariffs in order to allow both parties enough time to find common ground. However, this failed as negotiations fell through at the last hour on Friday night.
According to US trade representative Jamieson Greer, Canada declined to enter into finalization of the agreement on terms set by Washington already.
In light of the inability to resolve their disputes via negotiation, the United States implemented tariffs of 50% on roughly $20 billion worth of products from Canada. The products affected include things like hockey equipment, cement, dairy-related products, among other Canadian exports.
Even though these products represent only a fraction of Canada’s exports to the United States, politically, this move can be deemed as an extremely significant step, considering how close the trade relations between these two countries are – they are some of the biggest partners when it comes to the trade between nations.
The implementation of the tariffs will have far-reaching implications for the fate of USMCA and stability of supply chains of North America.
Prime Minister of Canada, Mark Carney reacted strongly to this latest decision made by the United States. Carney ordered that talks be suspended and for the Canadian trade negotiating team to return to Ottawa.
The prime minister believed that changes introduced to the proposal by the United States on the very last moment were both economically and politically unfavorable towards Canada. It was also confirmed that the Canadians will respond to the US tariff measures on the goods “dollar-for-dollar.”
United States and Canada have a strong economy-to-economy link. There are business firms in both the nations having cross border logistics supply lines especially for the automobile industry, manufacturing sector, energy, agricultural and construction sectors.
Increase in tariff rates raises the cost for imported items. These firms can opt to raise prices, reduce their production volume or find other alternatives as suppliers if this situation continues. Ultimately, in the end users could pay higher prices whereas these firms will suffer due to more uncertainty.
The dispute can also have an impact on business decisions regarding where these firms will manufacture these goods and what is the level of cross border trade.
The dispute is also escalating into one of serious political concern for both these nations. While Washington believes that the trade practices maintained by the nation are discriminatory towards the interest of US firms, Ottawa believes that US demand is unreasonable and damaging Canadian workers as well as its industries.
What makes this conflict significant is the long history of close economic and political ties between the nations which makes this dispute more of a political one rather than dispute between any particular product or tariff.
It has been reported that the United States and Canada had traded approximately $880 billion worth of goods in services last year reflecting the sheer magnitude of economic ties existing between the nations.
This would depend upon the types of products whose tariffs are raised and response of the companies to the increase in tariff. Canadian companies dealing in exports to US would consider the higher tariff rate on their products that could ultimately lead to lower demand from the consumers' part in the US.
Firms in the US using Canadian products for their production would also incur higher cost and this might lead to increase in the price and imposition of higher tariff rate to be paid by the consumers.
Similarly, the tariff measure imposed by Canada can also affect the business of America in same manner. For exporting the goods to Canada, American firms would incur higher costs.
The question that remains is whether both sides will go back to the negotiations or whether the current dispute would lead to the development of a major trade conflict.
There are high incentives for both sides to come to a deal since both sides are very dependent on each other economically. But what has happened in the last round of negotiations only emphasizes the difficulties in reaching any compromise.
For the Canadians, the current situation would accelerate the process of the diversification of trade relations. For Washington, prolonged tariffs could bring new costs for its companies that use the Canadian inputs in their processes.
