We are now officially at war with the United States – in a trade war, that is.
In response to U.S.-imposed tariffs on steel and aluminum, Canada intends to do the same on other goods. So like any trade war, it could escalate.
Canada will unlawfully implement counter measures that will take effect on July 1 if the U.S. doesn’t end its steel and aluminum duties. It’s like Walmart going up against that cute little gift store we visit every so often. And just to be clear, Canada is not Walmart in this scenario.
The trade war appears to be moving into agri-food, one of the most sensitive economic sectors when it comes to trade. Of the 84 items mentioned on Canada’s Table 2 list, 23 are food products.
History shows that trade wars are not kind to consumers when agriculture and food products are targeted. Food inflation tends to skyrocket when barriers are erected.
Canada imports more than $25 billion worth of agri-food products from the U.S. Fruits, nuts, vegetables, beverages and baked goods represent a big portion of what we buy from the Americans. But none of these items are mentioned in the federal government’s recently-issued notice of intent. In other words, it’s highly unlikely these counter-measures will become a threat to Canada’s food security – something trade wars tend to do.
In fact, categories with lower sales volume are being targeted, and most of the food products on the list do have Canadian-based alternatives in the marketplace. Yogurt, ketchup, pizza, mustard, maple syrup, chocolate, jam and whisky are also made in Canada.
Other categories, like prepared foods, mustard, soy sauce, or mayonnaise may be more problematic. As such, Canadians will likely see some American goods becoming more expensive, or perhaps some will be as expensive as many Canadian-produced products.
This could be welcome news for some of our businesses. The “Buy Canadian” movement will certainly see this as a needed boost.
The challenge, of course, is that many of the U.S. products are much cheaper, even when our dollar was worth below 75 cents against the U.S. greenback. Price points will likely go up and cheaper options could be limited.
But food retail prices have barely moved since January. Food inflation is at 0.1 per cent in Canada. Prices have room to increase, allowing grocers to breathe and increase margins.
If tariffs are implemented, grocers could see this as an opportunity to raise prices, regardless. If they opt to do this, it will be brilliantly subtle and consumers may not even notice the three-to-four per cent hike on prices of American-based food products.
In early 2017, Ottawa eliminated many tariffs on a long list of ingredients, including cereals and grains, fats and oils, fruits and vegetables, and food preparations. These measures allowed Canadian processors to save more than $200 million a year and strengthen their competitiveness at home and abroad.
The list just published doesn’t suggest that Ottawa intends to reinstate these tariffs, sparing the processing industry.
The notice of intent appears to be quite populist, targeting consumable food products that many Canadians buy regularly but not frequently. In fact, the list seems to include either products we manufacture or products we actually should be manufacturing more of, like soy sauce and mustard. In the case of mustard, few Canadians are aware that Canada is the largest exporter of mustard seed in the world. Most of it is sold to the U.S. and we buy it back in bottles at 20 times the price.
This could be the excuse we’ve been looking for to change this practice but it’s still too early to tell.
So it appears the list was cleverly put together.
The Canadian government has decided to retaliate by using an age-old scheme in trade wars: tariff barriers on food. Throughout history, countries protecting their market by issuing duties on food imports have seen how these measures can be dangerously short-sighted and can often backfire, usually hurting those who are supposedly being protected.
But Canada seems to be using a different playbook the the United States. Ottawa seems to want to send a clear message to Washington, while offering the food industry an opportunity to grow. Its notice of intent delicately strikes a balance between diplomatic resilience and economic inducement for our agri-food economy.
Consequently, it may not be such a bad thing if mustard and mayonnaise get more expensive.
But based on pure economics, Canada can’t win against the United States – not even close. The we’ll-show-them attitude can only go so far.
Some argue that the Canadian government is playing a game of chess with the Americans. Objectively, the game looks more like Russian roulette.
Many things could happen before July 1, though. We should all hope Canada has a long-term plan if this trade war lasts a while, as it likely will.
Sylvain Charlebois is dean of the Faculty of Management and a professor in the Faculty of Agriculture at Dalhousie University, senior fellow with the Atlantic Institute for Market Studies, and author of Food Safety, Risk Intelligence and Benchmarking, published by Wiley-Blackwell (2017).
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