Jack Mintz: With Trump’s Tariff Threat, We’re Reaping What We Have Sown

Donald Trump is using the threat of a 25 per cent tariff to bludgeon Canada and Mexico into taking action to halt to the flow of fentanyl and illegal immigrants into the U.S. This threat extends an emerging policy trend: it has now become acceptable to discard free trade in favour of trade barriers supporting other political objectives. But we’re reaping what we’ve sown.

It took centuries for the public to accept the idea that free trade is good for a country, a notion that began with two influential British political economists. In 1776, Adam Smith argued that mercantilism (favouring domestic production by restricting imports) leads to monopolies in the domestic market and prevents consumers from buying goods from the cheapest sources. In 1815, David Ricardo explained how the British “Corn Laws,” which protected agriculture, benefited farmers and land-owners but hurt the poor by raising corn and wheat prices. He argued that countries should pursue their comparative advantage by specializing in industries that make the most productive use of their labour. Eventually, in 1846, the Corn Laws were repealed and Britain adopted free trade throughout its empire.

Despite growing acceptance of free trade, mercantilism did not die. The imposition of tariffs by the U.S. in 1930 and retaliation by other countries shrunk world trade and deepened the Great Depression. That experience led to the formation in 1947 of the General Agreement on Tariffs and Trade to promote freer trade. In 1995, the World Trade Organization was created to continue GATT’s work of reducing both tariffs and non-tariff barriers to trade. Many countries also entered into bilateral or multilateral trade agreements, such as the Canada-U.S. Free Trade Agreement in 1988 and its successor, 1994’s North American Free Trade Agreement, with Mexico added as a third partner.

For decades Canadian trade policy experts have nattered on about diversifying away from the U.S. But that has not happened. The current federal government discouraged oil and gas diversification by opposing LNG plants and oil pipelines to the east and west coasts (though it did complete the doubling of the TransMountain pipeline after a decade). The integration of the North American auto market that began with 1965’s Auto Pact effectively discouraged auto trade with other countries.

Though Trump’s tariffs will hurt his own economy, the U.S. is in a better position to offset lost imports from Canada by expanding its own domestic production, which already accounts for almost a quarter of world GDP. On such short notice, it will be harder for us to find other buyers for our goods and services the U.S. ends up not taking.