The Art of the Transit Deal: Canada Holds Trump Card on Great Lakes Trade
US President Donald Trump has imposed a 25% tariff on Canadian Goods entering the USA. Canada holds a trump card in that the economy of several American states benefit from trade carried aboard ships that sail through Canada, between the Atlantic Ocean.
Introduction
Prior to taking the oath of office, then president-elect Donald Trump commented on the trade imbalance between the United States and both Canada and Mexico. He seeks to remedy the situation by imposing a 25% tariff on imports that enter the USA from both Mexico and Canada, America’s largest foreign supplier of oil. He has also suggested that Canada and Greenland become American states and has even proposed to take back the Panama Canal due to high transit tariffs. Trump’s tariffs will reduce the volume of freight that moves from Canada into the USA.
The tariffs would likely reduce the value of the Canadian dollar against the American dollar, raising the price of American goods in Canadian markets. Canadian markets would likely seek identical goods from alternative overseas suppliers, in turn reducing the volume of freight that would move north from the USA into Canada. During an earlier era, international cross-border cooperation between the USA and Canada resulted in the construction of the St. Lawrence Seaway and an international hydroelectric power dam. Ocean-going ships gained access to the Upper Great Lakes and the power dam provided electricity to both nations.
Canadian Energy Exports
Canada is America’s largest foreign supplier of oil and natural gas, both of which might be subject to a tariff of 10%. Some 85% of electric power imported into the USA comes from Canada. During winter month overnight hours and as a result of excess winter time generation of nuclear electric power, the Province of Ontario has actually paid American utilities with energy storage capacity, to take delivery of their excess electric power. The northeastern USA is dependant on hydroelectric power from Quebec, that in turn provides energy to operate high-speed passenger trains between Boston and New York City.
American refineries import Canadian oil that they process into transportation fuel. A tariff on that oil would translate into higher fuel prices in several regions across the USA, in turn raising domestic transportation costs. Americans who live in the northeastern region and who own battery-electric cars, consume electric power from Canada when they recharge their vehicles during the overnight hours. The cumulative effect of Trump’s tariffs on Canadian imports into the USA would reduce cross-border trade as well as reduce the number of trucks and shorten trains that cross the border each day.
Transportation Sector
Trump’s tariffs have the potential to increase fuel costs while reducing market demand for cross-border railway and truck transportation, in turn reducing earnings for the America commercial transportation sector. During his first term in office, President Trump committed to rebuilding the navigation locks at the east end of Lake Superior. He recognized the monetary value of domestic maritime transportation and its contribution to the economic strength of multiple states. A segment of the American economy located around the Great Lakes depends on a waterway that passes through Canada, to export their productive output to foreign overseas markets.
The St. Lawrence Seaway is of economic value to American exporters located around and near the Upper Great Lakes. If President Trump seeks to bypass the Gulf of St. Lawrence and the St. Lawrence River while exporting to overseas markets, he would need to rebuild the Erie Canal to transit much larger vessels between Buffalo NY and Port of Newark. In addition, he would need to extend navigation locks along the Upper Mississippi River to handle larger barge tows.
Transit via USA
Trucks and trains travel through the USA carrying trade between Mexico and Canada. If border officials reject paperwork pertaining to shipments, a tariff has potential to impact trade passing through the USA, delaying shipments and possibly even requiring payment of import taxes. The alternative would be to transfer trade moving between Mexico and Canada from truck and rail to maritime transportation and air freight. Western Canadian agricultural producers export bulk carried inside shipping containers that are loaded aboard ships that sail from Port of Duluth to overseas ports.
The manner in which US Customs officials interpret Trump’s tariff on Canadian goods entering the USA would determine whether Western Canadian producers would be able to continue exporting dry bulk inside containers shipped via Port of Duluth. Overseas customers prefer delivery inside containers. Unlike Duluth, the Port of Thunder Bay in Canada exclusively exports agricultural dry bulk being loaded directly into bulk carrier ships. Ships sailing from Port of Duluth to overseas destinations presently pass through a Canadian navigable waterway located downstream of the international hydroelectric power dam on the St. Lawrence Seaway.
The Art of the Transit Deal
In the event that Trump’s tariff impedes trade between Mexico and Canada that passes through the USA, Canada could seek to negotiate the art of the transit deal with the Trump administration. If Mexico – Canada trade cannot through pass the USA via road and/or rail, Canada could respond by impeding overseas bound American trade that originates from around the Great Lakes region and especially if Canadian producers cannot export via Duluth. While he has suggested “taking back the Panama Canal”, taking full control over the navigable waterway between the Atlantic Ocean and Great Lakes would be problematic.
Canada could suggest that Trump make America great again by developing the Erie Canal to transit much larger waterway vessels, also extend the length of the navigation locks along the northern sections of the Mississippi River to transit extended length barge tows. Such action would create employment for Americans and American businesses, as Trump said he would do during his campaign for office. When proposing tariffs, Trump publicly stated about Canada that “America does not need their oil or their wood”. Would he be willing to state that America does not need Canada’s inland waterway?
Smuggling Trade
During the 1920s era of prohibition, the smuggling trade carried a plentiful supply of booze from Canada into the USA. Tariffs represent a subtle form of prohibition which in turn makes smuggling lucrative. Over a period of decades, wild animals and farms animals have regularly walked across the US – Canada border, with farm animals being sent back. Trump’s tariffs could result in remuneration being sent back. Over the decades, the smuggling trade has proven to be quite innovative and ingenious as to how they have been able to transport goods across international borders.
Conclusions
President Trump’s initiative to rectify America’s trade imbalance with its trading partners by imposing tariffs on goods entering the USA, has the potential to impact the freight transportation sector, provoke political retaliation and promote smuggling. Tariff issues that reduce shipping between the Upper Great Lakes and the Atlantic Ocean via the Canadian waterway would likely require the Trump administration to redevelop and upgrade American inland waterways.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.
What Effects Will Trump's New Tariffs Have on Trade?
It’s official. On February 1, US President Donald Trump introduced a sweeping set of new 25% tariffs on imports from Canada and Mexico. China will also face new tariffs of 10%.
During the presidential campaign, Trump threatened tariffs against all three countries, claiming they weren’t doing enough to prevent an influx of “drugs, in particular fentanyl” into the US, while also accusing Canada and Mexico of not doing enough to stop “illegal aliens”.
There will be some nuance. On Friday, Trump said tariffs on oil and gas would come into effect later, on February 18, and that Canadian oil would likely face a lower tariff of 10%.
This may only be the first move against China. Trump has previously threatened the country with 60% tariffs, asserting this will bring jobs back to America.
But the US’ move against its neighbors will have an almost immediate impact on the three countries involved and the landscape of North American trade. It marks the beginning of what could be a radical reshaping of international trade and political governance around the world.
What Trump wants from Canada and Mexico
While border security and drug trade concerns are the official rationale for this move, Trump’s tariffs have broader motivations.
The first one is protectionist. In all his presidential campaigning, Trump portrayed himself as a champion of US workers. Back in October, he said tariff was “the most beautiful word in the dictionary."
Trump hasn’t hidden his fondness for protectionist trade measures. This reflects the ongoing scepticism toward international trade that Trump – and politicians more generally on both ends of the political spectrum in the US – have held for some time.
It’s a significant shift in the close trade links between these neighbours. The US, Mexico and Canada are parties to the successor of the North American Free Trade Agreement (NAFTA): the United States-Mexico-Canada Agreement (USMCA).
Trump has not hidden his willingness to use tariffs as a weapon to pressure other countries to achieve unrelated geopolitical goals. This is the epitome of what a research project team I co-lead calls “Weaponized Trade.”
This was on full display in late January. When the president of Colombia prohibited US military airplanes carrying Colombian nationals deported from the US to land, Trump successfully used the threat of tariffs to force Colombia to reverse course.
The economic stakes
The volume of trade between the US, Canada, and Mexico is enormous, encompassing a wide range of goods and services. Some of the biggest sectors are automotive manufacturing, energy, agriculture, and consumer goods.
In 2022, the value of all goods and services traded between the US and Canada came to about US$909 billion (A$1.46 trillion). Between the US and Mexico that same year, it came to more than US$855 billion. One of the hardest hit industries will be the automotive industry, which depends on cross-border trade. A car assembled in Canada, Mexico or the US relies heavily on a supply of parts from throughout North America. Tariffs will raise costs throughout this supply chain, which could lead to higher prices for consumers and make US-based manufacturers less competitive.
There could also be ripple effects for agriculture. The US exports billions of dollars in corn, soybeans, and meat to Canada and Mexico, while importing fresh produce such as avocados and tomatoes from Mexico. Tariffs may provoke retaliatory measures, putting farmers and food suppliers in all three countries at risk.
Trump’s decision to delay and reduce tariffs on oil was somewhat predictable. US imports of Canadian oil have increased steadily over recent decades, meaning tariffs would immediately bite US consumers at the fuel pump.
We’ve been here before
This isn’t the first time the world has dealt with Trump’s tariff-heavy approach to trade policy. Looking back to his first term may provide some clues about what we might expect.
In 2018, the US levied duties on steel and aluminium. Both Canada and Mexico are both major exporters of steel to the US. Canada and Mexico imposed retaliatory tariffs. Ultimately, all countries removed tariffs on steel and aluminium in the process of finalizing the United States-Mexico-Canada Agreement.
Notably, though, many of Trump’s trade policies remained in place even after President Joe Biden took office. This signaled a bipartisan skepticism of unfettered trade and a shift toward onshoring or reshoring in US policy circles.
The options for Canada and Mexico
This time, Canada and Mexico’s have again responded with threats of retaliatory tariffs. But they’ve also made attempts to mollify Trump – such as Canada launching a “crackdown” on fentanyl trade.
Generally speaking, responses to these tariffs could range from measured diplomacy to aggressive retaliation. Canada and Mexico may target politically sensitive industries such as agriculture or gasoline, where Trump’s base could feel the pinch.
There are legal options, too. Canada and Mexico could pursue legal action through the United States-Mexico-Canada Agreement’s dispute resolution mechanisms or the World Trade Organization (WTO). Both venues provide pathways for challenging unfair trade practices. But these practices can be slow-moving, uncertain in their outcomes and are susceptible to being ignored.
A more long-term option for businesses in Canada and Mexico is to diversify their trade relationships to reduce reliance on the US market. However, the facts of geography, and the large base of consumers in the US mean that’s easier said than done.
The looming threat of a global trade war
Trump’s latest tariffs underscore a broader trend: the widening of the so-called “Overton window” to achieve unrelated geopolitical goals. The Overton Window refers to the range of policy options politicians have because they are accepted among the general public.
Arguments for bringing critical industries back to the US, protecting domestic jobs, and reducing reliance on foreign supply chains gained traction after the ascent of China as a geopolitical and geoeconomic rival. These arguments picked up steam during the COVID-19 pandemic and have increasingly been turned into actual policy.
The potential for a broader trade war looms large. Trump’s short-term goal may be to leverage tariffs as a tool to secure concessions from other jurisdictions. Trump’s threats against Denmark – in his quest to obtain control over Greenland – are a prime example. The European Union (EU), a far more potent economic player, has pledged its support for Denmark.
A North American trade war – foreshadowed by the Canadian and Mexican governments – might then only be harbinger of things to come: significant economic harm, the erosion of trust among trading partners, and increased volatility in global markets.
Markus Wagner is Professor of Law at the University of Wollongong School of Law.
This article appears courtesy of The Conversation and may be found in its original form here.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.
No comments:
Post a Comment