'Shooting yourself in the foot': Why Canada has no good options on car tariffs

Major car manufacturing countries Canada included faced a grim reality as officials met in Geneva this week:

U.S. President Donald Trump's car tariffs (should he follow through and impose them) may be worse than anything they've dealt with so far, no matter what they do in response or retaliation.

No one's sure if the ceasefirebrokered by the European Union no furthertariffswhile new bilateral tradetalks get underway can hold, or if it even applies tocountries outsidethe EU.

"The stakes are immense," said DebraSteger, a former Canadian trade negotiator who helped build theWorld Trade Organization before joining the University of Ottawa's law faculty.

The economic impact of car tariffs "absolutely dwarfs" the steel and aluminum tariffs already affecting Canada's economy."Let's not fool ourselves," she said.

The U.S. Department of Commerce started its "national security" investigation into theallegedrisk posed by imported vehiclesand car parts last May. Commerce Secretary Wilbur Ross said itcould report back in August and recommendnew tariffs to Trump within months if the Americans aren't happy with how other countries are treating them at the bargaining table.

Canada needs to 'dig really deep'

Canada exports more cars, trucks and car parts to the United States than it imports. So if it wantsto retaliate with equivalent dollar value tariffs the way it didsteel and aluminum, it has to put other goods on its list of targeted imports from the U.S.

It washard enough for Canada to settle on its first list, addingand dropping productsafter small and medium-sized companieswarned they'd wind up as collateral damage if their costsjumped overnight.

A second list would need to bemuch longer.Putting it together would befarmore difficult.

"Canada would need to dig really deep in its tariff schedule,"Stegersaid.

Retaliation against a huge playerlike the U.S.isn't an effective strategyfor smaller countries lackingthe bargaining power of, say, the 500millionconsumers in Europe's common market.

"It's like shooting yourself in the foot,"Stegersaid.

Canada might need to look at taking retaliation to a new level by placing barriers on trade in services like banking and insurance restricting foreign investments or energy exports, or even denying the U.S. patent protection for intellectual property.

"Talk about a trade war that would be a very provocative move,"Stegersaid.

The automotive industry is too bigand too economically importantfor Canada, Mexico, the EU, Japan and South Korea to simply acceptitsdisruption on Trump's whim. Collective actionspeaksloudestif everyone staystogetherin the tent.

"This is exactly why the meeting in Geneva is taking place this week,"Stegersaid.

'No one is for it'

South Korea accepted import-restricting quotas fromthe Trump administration to dodgesteel tariffs. Recent modifications toits bilateral trade deal with the U.S. placedquotas on Koreancars, too.

TheEU'snow inbilateral talks with the U.S.to avoid car tariffs. The Trump administration may use car tariffs as leverage in Mexico'sNAFTA-relatedtalks with the U.S. this week.

"They all have different levels of skin in the game," said KristenDziczek, vice-president for industry, labourand economics at theCenterfor Automotive Research.

The localization of production insideNAFTA'stariff-free zone prompting, for example, German companies to assemble cars in Mexico, or Japanese companies to invest in Ontario facilities means Mexico and Canada have the most to lose if they aren't exemptedfrom the threatenedtariffs.

But if things really are turning sour, Mexico has more options than Canada does, thanks to some aggressivetrade deal-making around the world. Its foreign investment is growing and itsnon-NAFTAexports are expanding.

"They can start turning even more aggressively outward. Canada has a shrinking base,"Dziczeksaid.

That doesn't mean Americancarmakerswant Trump's tariffs, either.

"No one is for it,"Dziczeksaid. The United Auto Workers, which stood alone offeringpositive feedback during the Department of Commerce's hearings earlier this month, sees potential employment gainsbut is not wholly on board.

Recent analysisfromDziczek'sshop suggests even the best-case scenarios for American assembly plants result in a net loss of thousands of jobs across the industrybecause parts manufacturing and supply chains generally are heavilyintegrated north-south.

Dealerships also take a hit when cars become more expensive and consumersthink twice about buying new.

Even Trump's advisers don't agree on how to proceed. In dollar values, the U.S. imports six times as many automobilesand parts as it does steel and aluminum. This decision is"way bigger,"Dziczeksaid.

What's a good deal?

Washington's paying attention to howother countries are preparing to hedge their bets, and tohow the markets are reacting,said RachelZiemba, an adjunct fellow who focuses on trade and coercive policies fortheCenterfor New American Securityin Washington.

There's a "political calculus" at work as U.S. midterm elections approach, she said."If anything, co-ordination of major U.S. trading partners has only upped the ante of senators to look to frame and re-shape and challenge some of the administration's authority."

But it's also "increased the incentive" for those advocatingget-tough trade policies in American politics.Trump supporters remainskepticalof the merits oftrade, after all.

"The president never likes it when he thinks that people are ganging up on him,"Ziembasaid.

"It remains to be seen," she said, "what the Trump administration and President Trump himself would see as a good deal on the auto side," particularly after theapparent de-escalation of his threatfollowing his meeting withEuropean Commission President Jean-ClaudeJunckerlast week.

Think globally orsave yourself?

Import tariffs affect entire supply chains, not just the specificgoods taxed. Many countries, including those in the developing world, fear the dumping of cheap, displaced goods onceimport tariffs alterpurchasing decisions.

It's allcomplicated by Trump's preference for one-on-onenegotiations over collective action. The U.S. administration has panneda broadernegotiation on auto tariffs, for example, to focuson a better automotive deal inNAFTA.

"For every country there's a balancing act between trying to change and support the global rules and just focusing on their national interest,"Ziembasaid.

The common good may conflict with a country's desire to avoid crippling costs, particularly on the short-term horizons politicians worry about.

The U.S. is using "national security" investigationsto act unilaterally and dodge how the World Trade Organization restricts its trade policy.

"It's very tempting for Europe and Canada and China to say, 'We can go unilateral too,'but then that destroys the system," said JoelTrachtman, an international trade law professor at the Fletcher School at Tufts University.

AsJunckerwas reported to have told Trump last week, "We can also do stupid."

Trachtmanexamined howthe European Union, Canada and Mexico retaliatedafter steel tariffs were implemented and their legal justifications.He said he isn't sure their arguments willhold up.

"It's not politically or maybe even systemically satisfying, but the proper legal response is to bring an action" to theWTOfor arbitration, he said. After winning that case, those countries could then retaliate legally.

'Strategic patience'

WTOprocesses are slow, and getting slower, thanks in part to a lack of co-operation from the U.S. What about the economic damage in the meantime?

For years, there was an "informal trust" amongWTOmembers that led them to avoid usingbogusnational security arguments to protect strugglingindustries,Trachtmansaid.

Now this "informal glue has rotted away," ramping up pressure to reformtheWTO, he said.

Believe it or not, the U.S.'s national security tariffsmay beWTO-compliant while Canada'sretaliatory tariffsmay not be. The WTOgives wide latitude to countries when it comes to how they define their national security requirements while it tends to frown on nations deploying retaliatory tariffs without bringing an action before the WTO first.

Instead of moreretaliatory tariffs,Trachtmanadvises "strategic patience" until America sees reason.

"If the other guy drops rocks in theirharbour so you can't export to them, it still doesn't make sense for you to drop rocks in your harbour," he said. The economic pain caused by retaliation might be worse than the pain from tariffs alone, he said.

"It would probably make sense to just not retaliate at this moment, as bitter as it may then feel, but it would be a high-road thing to do."

Despite the pressure from domestic political to stand strong againsta bully, "you need somebody to say, 'We're doing adult trade' or, 'We're doing rational trade.'"

All well and good, saidSteger, who helped build theWTO'sappeal system and admits to feeling some emotional investment in it. But "tough cases are tough cases."

"Lawyers can stand on principle, but Rome is burning," she said. "Governments have to act out of the economic and political realities."