The U.S. trade deal with Japan and ongoing tariff talks with the European Union offer a framework of what Canada can expect in its negotiations with the Trump administration.Kent Nishimura/Reuters
This week may well be remembered as the moment Donald Trump’s tariff-centred economy came into focus.
In diplomatic terms, the world is entering an era in which countries desiring to export to America will be hit with a baseline tariff whose level will be calibrated to their willingness to cooperate with the U.S. President’s agenda.
In street terms, it’s a shakedown. Mr. Trump is using the United States’ economic muscle to force countries to swallow punitive trade terms in exchange for access to its markets, at the risk of harm if they don’t submit.
Japan this week signed a provisional agreement under which its exports to the U.S., will be tariffed at a baseline of 15 per cent, rather than at the 25 per cent Mr. Trump threatened to impose on that country if it didn’t reach a deal by Aug. 1.
In exchange for a less punishing tariff rate, Japan will open its market to more American goods, at least according to Mr. Trump’s description of the deal on social media.
The 15-per-cent tariff will also apply to Japanese cars, which were hit with the 25-per-cent tariff Mr. Trump imposed on all automobile and car-part imports in April.
On Thursday, the European Union was poised to strike a similar 15-per-cent deal in order to avoid Mr. Trump’s threat of 30-per-cent tariffs on Aug. 1.
Canada and the rest of the world now know what to expect – countries that play ball will have to live with a minimum tariff level on some of their exports to the U.S., and that the 15-per-cent rate consented to by Japan is likely a precedent.
Prime Minister Mark Carney saw this coming when he said on July 15 that the chances were low that Canada would be able to make a tariff-free deal with Mr. Trump.
He has also said that he is in no hurry to reach a deal by Aug. 1, when the U.S. says it will impose tariffs of 35 per cent on all Canadian goods not covered by the United States-Mexico-Canada free trade agreement.
He knows Mr. Trump holds most of the cards, but not all of them. Canada’s limited clout lies in the fact that it is the main export market for 36 American states.
It’s a leverage made stronger by the fact that some of those states, such as New York, Pennsylvania and Ohio, are major economies in their own right, giving them a powerful voice.
It also helps that the 36 states are represented by both Republican and Democrat congress members, and some, like Ohio, are powerful swing states. There is a bipartisan push in Washington to stop Mr. Trump from targeting Canada with abusive tariffs that could prompt retaliation.
Then there is the fact that, while this week has brought some clarity to countries negotiating with Mr. Trump (to the degree that any clarity from him is possible), it has also reinforced concerns about where the U.S. economy is headed.
All those tariffs Mr. Trump is imposing are being paid by U.S. companies and, eventually, U.S. consumers. To date, Washington has taken US$100-billion out of the pockets of American businesses; the total is expected to reach US$300-billion by the end of the year.
U.S. carmakers reported lower earnings and even some losses this month in part because of Mr. Trump’s tariffs. They also said they will have to start raising prices.
Major U.S. steelmakers, which are protected from foreign competition by Mr. Trump’s high tariffs on imports, this week reported they had opportunistically raised prices.
Mr. Trump’s team claim any inflationary pressures will be temporary, but others are waiting to see what happens when American companies use up their existing inventories and can no longer absorb the cost of the tariffs on their industries.
This comes at the same time as Mr. Trump’s “big, beautiful bill” will massively increase the U.S. debt and raise federal borrowing costs, and could slow growth in the coming years.
As well, his continued efforts to force the Federal Reserve to lower interest rates would, if successful, likely make inflation worse.
Mr. Trump showed his hand this week. Canada now knows better what to expect and can start to organize its economy and trading alliances accordingly.
The Canadian public, too, has a clearer picture of how important it is for Ottawa and the provinces to take quick action to eliminate internal trade barriers and start getting Canada’s resources to new markets.
Meanwhile, the future of the U.S. economy is getting foggier by the minute.