How tariffs work and why they've always mattered to Canada: Don Pittis

As Republicans warned U.S. President Donald Trumpover his Mexican tariff threats yesterdayand the Federal Reserve worriedabout how to respond,there are also new concerns that Canada is going to be caught in the downdraft.

If so, Canadianeconomic historianssay that would be no surprise, although they say Trump may be introducing some new twists.

The announcement by the U.S. presidentthat he would impose tariffs on Mexico has led to warnings the movecould kill the new NAFTAdeal and contributeto a deep recession. Inevitably Canada would feel the effect.

As Trump reiterated in London yesterday, a fiveper cent tariff on Mexican goods would escalate to 25 per cent if the country failed to stem the flow of illegal immigrants across its northern border.

The new tariff threat, which Trump reportedly made against the wishes of economic advisers, has worried Canadian businesses and politicians. It is alsoopposed by many Republican members of Congress who favour free trade, and by powerful representatives of U.S. industry who want to see the new NAFTA deal ratified.

"This latest tariff threat represents a major new obstacle to approval of USMCA, and the chamber is urging the administration to abandon this threat immediately," U.S. Chamber of Commerce vice-president John Murphy told the Washington Post.

Yesterday, the world's most powerful central banker, U.S. Federal Reserve chair Jerome Powell, weighed in as well, hinting that the Fed might have to cut interest rates if tariff wars between the U.S. and big trade partners like Mexico and China begin to damage theeconomy.

"We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion," said Powell in the standard cryptic language of central bankers.

Despite the danger of economic damage due to trade battles, perversely, stock marketsrebounded in anticipation ofmore cuts in interest rates.

1840s: Tariff changes cause chaos

But according to business historianJoe Martin from the University of Toronto's Rotman School of Business, when it comes to causing political chaos by changing tariff rules, Trump's moves are nothing compared toprevious tariffturbulence, including in Canada in the late 1840s.

Rioters burned the Parliament Building in Montreal in 1849."Elgin, the governor general, was assaulted in his carriage," said Martin.

It was a time of turmoil in Canadian history. Part of the reason for public anger, said Martin, was the 1846 repeal by the British Parliament of the Corn Law tariffs that had protected Canadian grain from foreign competition.

Originally the term tariff just meant a schedule of charges, a usage that still exists in some places, but increasingly it has come to be used interchangeably with import duties imposed by national governments on foreign goods.

And one of the things duties have always done is to block foreign competition, keeping prices high for companies (and consumers) within the tariff area. Before income taxes, tariffs were also a main source ofgovernment revenue.

And just as with the Corn Laws that helped farmers but made the grain expensive for Britain'sstarving poor, tariffs are always a battle of interests.

It is something noted by Michael Stamm, winner of this week's Canadian Business History Association award for his bookDead Tree Media.

Despite a general climate of protectionism between the U.S. and Canada before the First World War, powerful newspaper barons assured theirsupply of newsprint with tariff-free access toCanadian paper, creating a huge industry north of the border but damaging their own domestic suppliers.

"The paper makers did not have the capacity to reach the public through mass circulation newspapers and the publishers did," said Stamm. Of course, in the days before radio and TV, those media barons had enormous political clout.

Canada's invisible tariffs

Canada's highest import tariffs are on clothing and footwear, saidTeresa Cyrus, trade specialist and economist at Dalhousie University in Halifax, but the average consumer just doesn't know they are paying for tariffs.

"When we go to buy clothes at the Bay we don't see we're paying 16 per cent more, because the Bay is paying that and they're passing it along to us," said Cyrus.

As in the case of the paper makers and the newspaper publishers, it often depends on who has the most clout.

"The consumers of something like clothing and footwear, we are many in numberbut we are not organized, whereas the producers are small in number and highly organized."

In the case of Chinese goods imported into the U.S. there had been some dispute over whether suppliers or distributors would absorb at least part of the price increase caused by the tariffs, but the latest research shows that not to be the case.

"The U.S. consumer just paid the full increase," said Cyrus.

Possibly the trade battlethat caused the most damage in Canadian history involved the U.S.Smoot-Hawleylegislation of1930 that put tariffs on a wide variety of goods made by U.S. companies, and hit Canada hard.

"The economy was going into a dive and a lot of this was based on unfair trade that was the claim," said longtime Canadian trade economist Peter Warrian.

But Warrian says Trump is breaking new ground. Instead of adding tariffs for economic reasons as previous governments have done, the U.S. president used national security considerations to put tariffs on steel and aluminum, and is using potentially self-destructive tariffs on Mexico as a means of blocking immigration.

"I've been on this stuff for 30 or 40 years and I never have known a case made on such a grounds," said Warrian.

And while low interest rates, government spending and tax cuts have propped up the economyso far, he sees no reason sweeping tariffs on major trade partners could not once again have a ruinous effect on the U.S. domestic economy, with the traditional impact here in Canada.

"We're not there yet, but the orange lights are certainly blinking," said Warrian.

Follow Don on Twitter @don_pittis