Trump’s trade deal with Europe is a bad precedent for Canada

Do not break out the champagne. The trade “deal” agreed this weekend by the United States and the European Union bears the familiar elements of President Donald Trump’s evolving vision of trade under Trumponomics.

What’s been announced is better than the worst-case scenario of a trade war, but worse than the status quo.

It’s also the precedent that the White House is surely pointing to, as it negotiates with Prime Minister Mark Carney over the future of Canada-U.S. trade. Here’s what that precedent looks like.

1. Higher tariffs: The U.S. will level a 15-per-cent tariff on most imports from the EU. That’s the same tariff as was agreed earlier this month with Japan.

It’s a significant increase from where tariffs used to be. The World Trade Organization says that, last year, the average trade-weighted U.S. tariff on imports was 2.2 per cent.

2. Some exceptions: Some trade between the EU and the U.S. will move tariff-free, including aircraft and aircraft parts, some chemicals, pharmaceuticals and agricultural products, and semiconductors.

But other goods will face a higher tariff. For example, steel and aluminum get a 50-per-cent tariff. Tariffs on copper are pending.

Trumpenomics stands the status quo of many decades on its head. Instead of free trade as the default, with exceptions for certain products or sectors, the default is now the opposite: A baseline tariff on everything, with the possibility of negotiating (or the U.S. imposing) exceptions. Those exceptions could be lower tariffs, or higher.

3. Different countries, different deals: Japan got the same universal tariff as the EU, but without the sectoral exemptions. Britain got a 10-per-cent tariff, five percentage points lower than the EU, but British exports to the U.S. above 100,000 vehicles will face a 25-per-cent tariff.

4. Mr. Trump wants a payoff: The EU and Japan deals include promises to buy a lot more from the U.S., and invest a lot more in the U.S. The EU has agreed to buy US$750-billion of American energy products over the next three years, roughly triple the current level. Japan and the EU also agreed to invest hundreds of billion of dollars.

The dollar amounts are extremely specific, but everything else is as clear as mud. The EU would have to triple imports of U.S. oil and gas, which is likely impossible. And while the White House claims that Japan is handing over US$550-billion to Washington, for Mr. Trump to invest however he wants, Japan has quietly signalled that it agreed to nothing of the sort.

5. It’s not a deal, it’s a “deal”: All of these announcements are broad frameworks. The fine print isn’t public because there isn’t any. These aren’t binding treaties.

In any case, Ursula von der Leyen, president of the European Commission, doesn’t have the power to compel EU states to buy U.S. oil or invest in the U.S. And Mr. Trump has made it clear that nothing in these “deals” precludes him from introducing new tariffs in the future.

Mr. Trump got the EU and Japan to accept a baseline tariff, plus an evolving list of sectoral tariffs. They made vague purchase and investment commitments, which may mean little in the long run but allow the President to tell voters that he forced U.S. trading partners to pay up.

These are the precedents Canada is faced with.

If Washington continues to honour the United States-Mexico-Canada Agreement, we could end up in a favourable position compared with other U.S. trading partners. Even under a 15-per-cent universal tariff, most exports from Canada could be exempt under USMCA.

However, sectoral tariffs – some of which effectively override USMCA – hit Canada hard. EU goods and services exports to the U.S. are roughly double the value of Canada’s, but the EU economy is 10 times larger. That means Canada is five times as trade exposed to the U.S.

Carney says Canada’s trade situation with U.S. differs from that of the EU

Canada is a major exporter of steel, aluminum, copper and lumber, all of which face sectoral duties. And though Canada’s auto industry is partly protected by USMCA, it is also partly outside it, because supply chains are global.

As I’ve been writing for months, it’s clear that Mr. Trump’s goal is higher tariffs. He’s making rapid progress.

What’s unclear is to what extent the USMCA umbrella will remain, allowing Canada to get less wet than others, or whether the U.S. will insist on soaking us with a growing list of sectoral tariffs.

The new uncertainty is Mr. Trump’s demand and receipt from Japan and the EU of a kind of tribute, in the form of commitments to invest in and buy from the U.S.

The vagueness and unenforceability of these tributes may offer Canada an opportunity to make vague and unenforceable promises, in exchange for lower tariffs. Then again, going down this road – paying the Americans for the right to trade with them – could be the start of endless troubles.

Getting Japan and the EU to bend the knee will not benefit the U.S. economy or American consumers. But it leaves Mr. Trump flush with confidence, and confidence whets his appetite for wins. It puts Team Carney, and Canada, in a difficult position.