Canada goes the Washington way on tariffs

To those northern hemisphere types who have been holidaying over their summer, welcome back. (I intermittently get grief from Brazilians, Australians, New Zealanders and so on for being southern-hemisphericist, so this is for you: hope you’ve had a nice winter.) The very-much-northern nation of Canada welcomed us back to reality last week by following the US’s lead and slamming tariffs on Chinese electric vehicles, steel and aluminium. There now follows an autumn (or spring for some, I’ll stop this now) of anxiously watching the US election campaign. Charted Waters is on Chinese EV investment worldwide. Question: if you’re such a clever multilateralist free trader, what would you have done in Canada’s place without breaching World Trade Organization law or infuriating the US? Answers to [email protected].

Seems that everything’s gone wrong since Canada came along

It’s from a song, for those tolerant of profanity, with credit to Sam Lowe in his excellent Most Favoured Nation newsletter last week for getting there first. And hello to any Canadians reading this on Labor Day today.

There’s been a lot of disappointment from trade types at Canada’s decision last week to follow the US, not least from Canadian trade folk themselves. You can see the domestic political case: an election is coming up in the next year. You can see the geopolitical case: heavy pressure from the US. You can see the related commercial case: the Canadian car industry is heavily integrated in the North American auto supply chain. It’s a tricky judgment, and it does have defenders, but it looks a lot more like giving in to US bullying than a considered view.

The US has been working to stamp its own mark ever more firmly on that production network. In the course of turning Nafta into USMCA, it tightened auto rules of origin in the hope the car supply chains wouldn’t, as the great Canadian bard Leonard Cohen almost sang, bring you EV inputs that come all the way from China.

The US clearly prefers to slow the adoption of electric vehicles than import them from China. Given Canada is a greener country (at least under the present government) than the US, the Washington way isn’t its preferred route. But tough. You can choose your friends but not your neighbours.

A lot of the disappointment among trade folks is the way Canada did it, with no apparent attempt to find a way of making it compatible with WTO rules, for example by playing around with the rules on trade defence measures. Canada has traditionally prided itself on its multilateralism: a group of countries pushing for reform of the WTO was convened in Ottawa in 2018 and bears its name. That claim now looks a bit empty.

Ottawa has handed Beijing a golden chance to advertise its own multilateralist credentials by bringing a WTO case, which it will very probably win. Canada is a member of the snappily named Multi-Party Interim Appeal Arbitration Arrangement (MPIA), the workaround institution that a bunch of countries set up to sidestep US intransigence over unblocking the WTO’s official Appellate Body. So if China wins at both the first (panel) and the MPIA stage, Canada will look even more blatantly hypocritical if it fails to comply.

Let’s you and him fight

Obviously this move is welcome in Washington, as evidence the US is starting to construct an anti-China trade alliance. That seems a bit optimistic to me. Not only have other big economies already embarked on a very different EV strategy, there’s an unfortunate and unattractive asymmetry to being a US ally.

China has been notably reluctant to bring a WTO case against the US’s EV tariffs, not just because the US ignores rulings it doesn’t like but because President Xi Jinping thinks it wiser not to poke Washington in the eye before an election. He is unlikely to show the same forbearance with Canada. So Canada’s out on its own.

USMCA, unlike Nato, doesn’t have a mutual defence clause. Following the US’s lead is a bit like joining a platoon led by a particularly aggressive commander whose body armour is considerably better than yours.

The EU at the moment might well be feeling pretty miffed that, unlike the US, it has tried to do the China EV tariffs thing according to the rules, citing the prospect of damage to European car manufacturers to impose anti-subsidy tariffs. And yet it’s being threatened with a WTO case and what’s fairly obviously direct retaliation by China.

This is evidence, sadly, that in dealing with China over trade it can help to make them think you’ll do something crazy rather than by the book. Still, it’s nonetheless very unlikely the EU is going to join the US in an anti-China EV gang (though it does have more shared sympathies on steel and aluminium).

Brussels has already set out on the path of integrating with China’s EV industry, slowing but not stopping imports and encouraging Chinese manufacturers to invest in Europe. Many big middle-income economies such as Brazil and Turkey (see Charted Waters below) have done the same. Washington’s bullying has got Ottawa into line, yes. It’s not clear it has enough clout to expand the posse beyond that.

Charted waters

Trade links

Politico reports that several China EV makers have offered the EU guarantees of maximum import volumes or minimum prices to avoid anti-subsidy duties ahead of a decision in October.

A paper from the Peterson Institute shows how the EU is becoming more dependent on imports from China, unlike the US, but a study by economists at the US Federal Reserve argues that America is indirectly becoming more reliant on Chinese goods via other foreign suppliers.

Writing in the FT, Adam Tooze says that rich countries’ generosity towards aid for Ukraine is not matched by its concern for much poorer countries in Africa.

Scott Lincicome from the Cato Institute suggests that deregulation rather than Kamala Harris’s anti-price gouging campaign will help control food prices.

A big Trade Secrets hand for Spain’s PM Pedro Sánchez, who had the guts to eschew the usual European hypocrisy and make a positive case for immigration in the face of the usual unpleasant rhetoric from his rightwing opposition.

European officials have warned Sir Keir Starmer that he needs to talk to the EU centrally to reset the UK-EU trade relationship, not just chat with Berlin. Meanwhile, the UK business and trade department continues to think signing an economically trivial trade deal with Israel would be a fine idea.

Trade Secrets is edited by Harvey Nriapia