A trade war bell is hard to unring
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Canadian hockey and basketball fans are booing the U.S. national anthem at games. Liquor stores in Ontario are taking American booze off their shelves. Do you know what it takes to make Canadians this mad at you?
Why it matters: It takes a trade war, apparently. And regardless of whether Trump's promised tariffs go into effect, Canadians' newfound open hostility to the United States is an example of the longer-term economic risks at play.
- There are estimates floating around on what the new import taxes mean for GDP and inflation, but the numerical details miss the point.
- This will prove a very difficult bell to unring and points to a new era in which businesses cannot count on any country to be a permanent partner of the United States.
By the numbers: If promised 25% tariffs on Mexico and Canada (10% on Canadian energy) are implemented and the countries retaliate as they promise to do, it would add 0.76 percentage point to U.S. inflation and subtract 0.4 percentage point from U.S. GDP growth, estimates the Yale Budget Lab.
- An extended trade war would prove costly for specific sectors, including U.S. automakers (who rely on supply chains that crisscross North American borders), homebuilders (who use Canadian lumber and gypsum) and agriculture (fertilizer).
Yes, but: The United States is a large, resource-rich, geographically diverse nation that relies less on imports than smaller countries. That's why neither forecasters nor financial markets are betting that aggressive trade measures will cause recession.
Between the lines: As the U.S.-China relationship has become more hostile over the past decade, Western companies have looked for ways to decrease dependence on China. A frequent solution offered by the corporate class was "friendshoring."
- The idea is to shift supply chains toward countries with deep, stable relationships with the United States.
- The trade relationships with Canada and Mexico have been viewed as the most stable of all, built upon the North American Free Trade Agreement enacted in 1993 and an update of it, the U.S.-Mexico-Canada Agreement, signed by Trump five years ago.
Flashback: "The USMCA is the largest, fairest, most balanced, and modern trade agreement ever achieved," Trump said then.
- That embrace of North American trade, combined with the Biden administration's emphasis on friendshoring and deepening relationships with allies, gave a green light to companies looking to invest further in a North American supply chain.
- But now, Trump has pushed toward higher tariffs on imports from Canada and Mexico than from China.
What we're watching: Does the cross-border hostility created by the possible trade war between neighbors with a three-decade-old free trade deal — symbolized by those boos at an Ottawa hockey arena — portend a broader breakdown in this economic interconnection?
The bottom line: There's no such thing as friendshoring if you don't have any true friends.
