Trump’s ‘Jacked-Up’ Manufacturing Push a Headache for Canada

Updated on
  • Canada runs surpluses with U.S. in male-dominated industries
  • Auto protectionism brings the northern border in focus

Trump: We Will Be 'Tweaking' Our Trade Deal With Canada

When Donald Trump met Justin Trudeau on Tuesday, the talk was of bridges instead of walls.

The first meeting between the new U.S. president and the Canadian prime minister ended with a commitment to allow cargo trucks to more smoothly traverse the planned Gordie Howe International Bridge, which would cross the Detroit River to connect Michigan with Ontario.

Despite the areas of agreement, including mutual cooperation between the two countries “to advance free and fair trade,” America’s neighbor to the north could still become a testing ground for Trump’s brawny brand of economic policies. That’s because Canada and its wealth of auto plants, steel works and iron smelters, risk bumping up against a key plank in the administration’s plans to boost domestic production by promoting traditionally male-dominated industries including lumber mills, shipyards and metal manufacturing.

“There’s certainly a policy risk to the downside,” said Randall Bartlett, chief economist at the Ottawa-based Institute of Fiscal Studies and Democracy. “On a sector-specific basis, U.S. protectionism may help certain industries in the short run by reducing competition.”

‘All Jacked Up’

Canada imports more from the U.S. than it exports when taking into account services, but that trade deficit morphs into a small surplus when only goods are included. And while that trade imbalance pales in comparison to the size of ones run by other countries, this is a case in which Canada’s closeness to the U.S. -- long a boon -- could become a hindrance.

Three industries stand out when it comes to Trump’s plans to promote shipyards and iron smelters and – in the words of Steve Bannon, senior presidential adviser -- “get them all jacked up.” Canada runs notable surpluses with the U.S. in primary metal manufacturing, wood products, and transportation equipment. Oil and gas, another area of surplus, appears less likely to come under scrutiny given the president’s enthusiasm for the proposed Keystone XL pipeline, which would link Alberta to Nebraska.

The risk is that trade imbalances in specific sectors set the stage for conflict between Trump and Trudeau, potentially fought through changes to the North American Free Trade Agreement or targeted tariffs. On Tuesday, in a joint press conference with Trudeau, Trump talked of “tweaking” Nafta in order to make it better for both countries.

“What we should anticipate is incremental adjustments to certain sectors that are already sources of pressure, like softwood lumber for example,” said Frances Donald, senior economist at Manulife Asset Management in Toronto.

Ontario’s Loss, Indiana’s Gain

Moreover, if Trump views trade as a tactical zero-sum game, geographic proximity can become a weakness for his targets as companies seek to placate the president by shifting jobs and factories state-side. On that front, production decisions made in the Great Lakes region are of particular importance to the new U.S. administration. Four states in that area flipped in the Republicans’ favor in 2016, and were pivotal in delivering the victory to Trump.

It wouldn’t be the first time the U.S. poached factories from Canada, either. The Electro-Motive Diesel plant shifted operations from London, Ontario to Muncie, Indiana back in 2012.

It may not be that simple for Trump to engineer a ‘he-covery’ in the U.S. through protectionist trade policies that benefit specific sectors, according to a new report by the Lawrence National Center for Policy and Management and the Ivey Business School.

Due to Nafta as well as auto deals stretching back to 1965, the Great Lakes region on both sides of the border has become an economic unit unto itself, with vertically integrated supply chains spanning the international boundary. Generally, it’s more efficient to produce parts stateside and assemble them in the north -- so Canada runs a trade deficit of more than $13 billion in auto parts, and a surplus of more than $31 billion in passenger cars with the U.S.

‘Perverse Incentive’

Surgical measures to move Canadian auto assembly jobs to the U.S. would probably have a muted effect on the balance of trade in motor vehicles and parts as a whole, the report said. Meanwhile, producing these cars would also become more expensive, and either reduce the competitiveness of the U.S. automotive industry or crimp profit margins, it added.

“There’s a weird perverse incentive whereby thickening borders you promote exports coming into U.S. because it gives advantages to importing completed goods rather than shipping goods back and forth across North American borders,” said Mike Moffatt, co-author of the report in his capacity as an assistant professor at Ivey Business School in Ontario. “What’s going to happen is you’re going to increase production costs, and those are costs that won’t be borne by overseas manufacturers.”

Other Trump administration policy priorities might be more effective when it comes to encouraging manly industries, Moffatt said, pointing to deregulation as something that could bear fruit by improving the competitiveness of the Great Lakes region.

“Like the Gordie Howe Bridge, we need to find ways to lower costs,” he said. “Having trucks delayed for less time when crossing the border by cargo pre-clearance is an amazing idea.”

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