Nobody Wins A Trade War



 In 1930, interventionist President Herbert Hoover imposed steep tariffs (an average rate of 60%) on many industrial and agricultural goods with the passage of Smoot-Halley. The imposition of these increases, which led to the second-highest tariff rates in American history, prompted a sharp retaliatory response from affected European nations, who were also in a serious recession. These retaliatory tariffs devasted the export-dependent American agricultural sector, the collapse of which caused the widespread failure of rural banks. Were it not for Smoot-Halley, and other measures taken by Hoover that aggravated the economic situation, the Great Depression would have been just another brief panic.

How then, should Justin Trudeau or his successor respond to the 25% across-the-board tariffs announced yesterday by the US president? There is no question that tariffs on the import of Canadian goods will hurt Canadian producers. That is the point. Nevertheless, our politicians should not allow themselves to be baited into a trade war by Donald Trump. Nobody wins a trade war, and our already bruised and battered economy can hardly sustain further setbacks.

US President Donald Trump 

Unfortunately, trade pacifism is not in the cards. Unifor, Canada's largest private-sector union, has called for swift retaliation. Jonathan Wilkinson, the Natural Resources Minister, has said that nothing is off the table when it comes to the Canadian response. Even Doug Ford has joined in the trade bellicosity, threatening to pull American booze from the LCBO as a potential response. The lone voice of sanity amongst the Canadian political establishment over the tariff threat has been Danielle Smith, the premier of Alberta, who has advocated for trade diplomacy.

The best trade policy is a unilateral policy of free trade. The benefits of free trade have been well-established in the economic literature over the last several hundred years. Foreign competition forces domestic firms to become more efficient or to go broke and have their factors of production acquired by another company. Imported goods allow consumers to enjoy lower prices and through specialization and trade, we can all reap the benefits of increased productivity. 

Imposing retaliatory tariffs on American imports will hurt Canadian consumers by raising prices. A much wiser response would be to do nothing at all. However, the optimal response would be instead of imposing additional trade barriers, the Canadian government should eliminate the ones that are currently in place. Eradicate the supply management program, eliminate all quotas, tariffs, or other barriers to foreign trade, and embrace once and for all the policy of free trade. An ancillary benefit to this approach is that politicians could cease once and for all these ridiculous and expensive taxpayer-funded junkets to negotiate unnecessary "free trade" deals. We don't need free trade deals, we need free trade.

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