T Day has come

The North American market is one of the most integrated in the world.  Over $1 billion of trade crosses the US/Canada border each day. Forty years since the North American Free Trade Agreement (NAFTA) entered into force in 1984 and just under five years since President Trump himself signed the successor United States Mexico Canada Agreement (USMCA), the future has been thrown into doubt by the President’s latest executive order.  Tariffs of 25% have been placed on exports by Canada and Mexico and 10% on China (in addition to the 25% applying since the first Trump Administration).  Retaliation has been swift to follow.   T Day has finally come.

Why, why, why?

President Trump has pointed to continuing imports of fentanyl and illegal immigration as justification for this unprecedented move.  The tariffs have been applied under the International Emergency Economic Powers Act (IEEPA). This is the first time the IEEPA has been used to justify tariffs (President Biden invoked IEEPA to sanction Russia immediately after it invaded Ukraine).  It is not at all clear that IEEPA can be used in this way and legal challenges will almost certainly follow.  

In an earlier executive order signed on taking office President Trump sought advice from agencies by 1 April on a raft of trade issues including trade with all three countries.  He has not waited for this advice before taking tariff action this weekend. Presumably this advice will set the stage for actions against other trading partners (he clearly has the European Union as well as the BRICs members in his sights).

Tit for tat

All three affected countries have retaliated as they were expected to do.  The US accounts for 75% of Canadian exports and 80% of Mexican exports. Canada’s package targets around 30 percent of US exports to Canada with 25% tariffs, some later this week and the bulk after 21 days.  A large number of consumer products including food are included. Canadian provinces are also taking action with their competence – the British Columbia government has announced a ban on US wine purchases in its (monopolistic) provincial liquor outlets (more NZ wine could be on offer for lucky BC consumers!). Mexico’s product list is narrower and amounts to tariffs of between 5 and 20%.  China has pledged action but this is unspecified at present.  Of concern is that the executive order signed this weekend gives the President the power to increase tariffs further in the face of retaliation.  The WTO Director General has expressed alarm about the impact on the global economy.

A HUUGE impact

There’s little doubt these tariffs violate USMCA as well as WTO tariff bindings.  Supply chains will be seriously disrupted –  the auto industry in Canada and the US will be particularly hard hit with car makers on both sides of the Canada/US border already speaking of plant closures.  It places extreme economic burden on Canada and Mexico with analysts predicting both countries could be driven into recession.  It will likely add to inflation and unemployment in the US – the impact has been measured at between US$835 per person and US$3342 per household.  It will increase tension with China, give rise to trade diversion and de-stabilise markets around the world.

What about everyone else?

In terms of wider impact these tariffs will give rise to trade diversion with displaced exports from all countries looking to other markets.  As noted above, there will likely be some immediate opportunities to replace US products in affected markets.   Attention needs to be maintained on what actions the US might take including after the 1 April deadline for the earlier trade memorandum. The US President has now clearly signalled he cares little for commitments made in binding trade agreements, including ones he himself signed. This should be borne in mind by those who still hold hopes for a future NZ FTA with the US.

This post was prepared by Stephen Jacobi, Executive Director of NZIBF.