Canada actually in a stronger position than Trump assumes

Hey there, time traveller!
This article was published 13/02/2025 (268 days ago), so information in it may no longer be current.

As Canada’s steel and aluminum exporters brace for the impact of a huge tariff on their exports to the United States, the way in which they respond to the tariff could determine not just the long-term viability of their respective businesses, but the length and severity of the looming Canada-U.S. trade war.

On Monday, U.S. President Donald Trump announced that the United States will impose a 25 per cent tariff on all shipments of steel and aluminum into the U.S., beginning on March 12. A few hours later, it was clarified that the steel and aluminum tariff would be over and above any general tariff that may be imposed on Canadian exports into the U.S.

As such, if the U.S. proceeds with its planned 25 per cent tariff on all Canadian commodities, goods and services, the tariff on Canadian steel and aluminum will be 50 per cent.

Such a levy, which would be collected by the U.S. government when the product enters that country, could have a devastating impact on the Canadian steel and aluminum industries, and on their many American customers.

That is because Canada is America’s top supplier of both steel and aluminum, and the U.S. is the top customer for those Canadian industries. Approximately one half of all steel produced annually in Canada, and more than 90 per cent of its yearly aluminum production, is currently exported to America. Those exports currently have a combined value of approximately $35 billion annually.

In theory, the purchaser pays the tariff, meaning that the extra charge is a problem for American importers, not Canadian producers. In reality, however, the situation is far less straightforward, involving much more risk for the Canadian side of the equation.

Though the steel and aluminum tariff was only announced on Monday, there have already been reports of American importers demanding that their Canadian suppliers reduce the prices of their products to offset some or all of the increased cost caused by the tariff.

Such a demand forces Canadian suppliers to make what appears to be a difficult choice: Do they agree to cut prices to save jobs, even if it threatens the profitability of their business? Or, do they hold firm, hoping that the purchaser doesn’t walk away?

This is the trap within Trump’s tariff. When he claims that Canadian exporters will pay the tariff, and that it will not impact U.S. importers, this is what he is talking about.

He is betting that Canadian exporters will drop their prices to protect their businesses and that those lower prices, combined with the rising purchasing power of the U.S. dollar compared to the Canadian dollar, will erase any increased cost that would otherwise be borne by U.S. importers.

In short, he is attempting to take advantage of Canadian exporters’ desperation to save their businesses, along with a lower Canadian dollar, to ensure that the tariff is painful for Canadians but pain-free for Americans.

His strategy is based on at least four assumptions: First, that most Canadian exporters will cut their prices rather than stand firm. Second, that the U.S. is Canada’s sole market for much of its steel and aluminum production. Third, that America doesn’t need our steel and aluminum and, fourth, that Canada is powerless to respond to the steel and aluminum tariff.

On all four assumptions, he is wrong. The only reason for Canadian steel and aluminum exporters to reduce the prices they charge their American customers is if they can’t sell their products to anybody else who is willing to pay full price.

That isn’t the case here. There are other international markets for Canada’s aluminum and we currently import as much steel as we export to the U.S. If America isn’t willing to pay a fair price, the steel can be sold both within Canada and to other international purchasers who are willing.

Beyond that, America depends on a steady supply of Canadian steel and aluminum to build its cities, infrastructure, vehicles and military. Without a reliable supply of Canadian product, who could the U.S. turn to? China? Please.

Finally, Trump is about to learn that Newton’s third law of motion — “for every action, there is an equal and opposite reaction” — also applies to international trade. The Canadian government has already signalled it will impose dollar-for-dollar tariffs in retaliation for Trump’s tariffs, costing U.S. jobs and making life more expensive for Americans. Withholding vital commodities such as oil, gas, electricity, food products and/or critical minerals, would also cause serious discomfort for America.

With all of that in mind, Canadians would be wise to take a deep breath and remember that we are still in the earliest stage of this trade war. It will soon be our turn to play our cards.