Don’t despair over trade war

When U.S. President Donald Trump ignited his trade war with China, many analysts predicted doom.

There were fears that tit-for-tat tariff increases between the world’s two largest economies would throw the global trading system into a tailspin.

Some warned the dispute might spark another Great Depression.

As it turned out, none of this happened. The world economy didn’t collapse. Neither did global trade.

In both Canada and the U.S., the unemployment rate dropped to levels unseen in decades.

On Friday, Statistics Canada reported that a record 106,500 jobs had been created in April. That brought Canada’s jobless rate down to 5.7 per cent.

In the U.S., the unemployment rate has dropped to a stunning 3.6 per cent and wage growth is on the rise.

Why was there no crisis?

The answer is complicated. In part, the doomsayers got it wrong because they confused free trade with all trade.

Tariffs limit trade. But they do not necessarily stop it. Canada’s softwood lumber industry, for instance, has been hurt by U.S. tariffs on its products. But these tariffs haven’t eliminated all of Canadian softwood lumber exports to the U.S.

America remains Canada’s No. 1 foreign market for lumber.

Similarly, Trump’s tariffs on Chinese-made goods haven’t eliminated all of China’s exports to the U.S. They have simply raised the cost of these goods for American consumers.

Whether this hike is enough to price Chinese goods out of the market depends on how easy it is to find alternatives.

Second, those predicting disaster forgot how infinitely flexible capitalism is. Companies facing tariffs on their exports to one country will search out markets in another. Some will focus on domestic markets, particularly if these too are tariff protected.

I expect that this flexibility explains how Canada’s steel and aluminum manufacturers were able to finesse Trump’s tariffs on these products.

Some jobs were lost, but the feared apocalypse in steel and aluminum never materialized.

A survey done by the federal government’s Export Development Canada in late 2018 found that only one-third of exporters overall were harmed by the tariffs.

Of these, 19 per cent dealt with the problem by raising prices, while another 18 per cent found alternative markets.

Third, as Nobel Prize winning economist Paul Krugman has pointed out, trade wars are unlikely to lead to economic recessions.

While free trade does make the world operate more efficiently, the gains from this are not huge. The more important effect of tariffs is to shift production from one jurisdiction to another.

Canada’s tariffs on dairy products, for instance, are designed to favour domestic farmers over foreign ones. That imposes a small cost on Canadian consumers, but the main effect is to keep dairy production at home and discourage it from moving to the U.S.

World dairy production in total isn’t much affected.

Similarly, China’s non-tariff trade discrimination against Canadian canola producers may hurt farmers here in the short run. But it also opens up opportunities for those from other countries.

What will Canadian canola producers do in the long run if the Chinese market remains closed to them? I expect they will do what this country’s canny farmers always have done: Find other markets for their grain or switch to another crop.

They will survive a trade war. And so will the rest of us.

Thomas Walkom is a columnist with Torstar Syndication Services.

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