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Facing Trump’s threat of auto tariffs, Canada’s response isn’t so clear

Facing Trump’s threat of auto tariffs, Canada’s response isn’t so clear
Retaliation against steel, aluminum tariffs has been proportional, sophisticated

Tuesday, July 24, 2018
Bloomberg

Canada fired back at Donald Trump’s metals tariffs with dollar-for-dollar retaliation. For autos, it may not be so simple.

One of Prime Minister Justin Trudeau’s envoys said last week the government would respond “proportionally” if the U.S. imposes tariffs on vehicles and parts, though Canada hasn’t begun preparing any formal retaliatory package, two people familiar with the matter said. This contrasts with the European Union, which is already preparing a list of American goods to hit with protective duties in the event of auto levies.

The U.S. Commerce Department has until February to report its recommendations to Trump, who has the final say on what tariffs might be imposed on global auto imports. At hearings in Washington last week, industry groups, workers and foreign governments almost universally condemned the idea.

Stakeholders in Canada are conflicted on how the country should respond. An industry group representing car dealers warned that retaliatory tariffs would have a much bigger impact than the steel and aluminum duties, while others say Canada has to hit back just as hard.

TIT-FOR-TAT

“We cannot afford tit-for-tat, dollar-for-dollar on automotive,” said Michael Hatch, chief economist for the Canadian Automobile Dealers Association. “In these situations, we’re pointing the gun at ourselves so we’re just urging the government not to pull the trigger.”

Canada’s auto-supplier association disagrees, saying the country has no choice but to respond in kind with counter-tariffs on U.S. autos and parts.

“I say that with a heavy heart because it’s of no benefit to anybody, but how do you get a bully to back off when their foot is on your neck? Do you plead with them or do you bite the foot?” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association. “Not responding is not an option.”

One of Canada’s biggest auto suppliers backed that view, saying the country doesn’t have a choice but to retaliate.

PRECARIOUS SITUATION

“It’s such a tough question because on the one hand, if our businesses are negatively impacted, how can we not react? On the other hand, obviously the reaction escalates an already precarious situation,” Linda Hasenfratz, chief executive officer of Linamar Corp., said in an interview. “I feel like our government’s probably going to be left with no choice but to react, just like they had to with the metal tariffs. You can’t ignore the imposition of tariffs on your country’s exporters and producers.”

Rob Wildeboer, chairman of Martinrea International Inc., said it’s too early to decide whether retaliatory tariffs will be necessary, and Canada will have to “cross that bridge when we come to it.” He is supportive of the Canadian metal tariffs.

“The Canadian response to the steel and aluminum tariffs has been proportional, it has been fairly sophisticated and it’s been done with consultation,” he said.

There’s a lot at stake for the industry. Car parts makers Magna International Inc., Linamar and Martinrea could see stock price declines of 31 per cent, 20 per cent and 24 per cent respectively under a tariff-war scenario, according to BMO Capital Markets analyst Peter Sklar. A study by Toronto-Dominion Bank found U.S. auto tariffs would push the Canadian economy into a recession and put one in five Ontario manufacturing jobs at risk.

NAFTA TACTIC

The auto tariff is seen as a potential tactic to pressure Canada and Mexico into concessions in talks over the North American Free Trade Agreement. Perrin Beatty, chief executive officer of the Canadian Chamber of Commerce, said the government’s focus right now should be on preventing U.S. tariffs — not on whether or how to respond.

Tariffs “would cost jobs in each of the three countries, and result in slower economic growth as a consequence,” he said. “What the president is doing is suggesting using the nuclear option, notwithstanding the fact that it would inflict serious damage on the U.S. economy as well.”

Canada’s federal government and the provincial government of Ontario, the heart of the country’s auto sector, testified last week at U.S. hearings and argued against tariffs.

“Imposing tariffs on automotive imports from Canada would undermine U.S. security and would have a devastating impact on U.S. competitiveness in the auto sector,” Kirsten Hillman, Canada’s deputy ambassador to the U.S., told the Commerce Department hearings. Canadian vehicles exported to the U.S. are made of more than 50 per cent U.S. content — meaning U.S. firms and consumers would be hurt. “Should this investigation ultimately result in the application of tariffs on autos, Canada will once again be forced to respond in a proportional manner.”

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