This Is Not A Joke Or '90s Movie: Here's How A Trade War With Canada Could Happen

President Trump’s new tariffs on Canadian lumber will cause anger in Canada, but could also be a step towards a much broader trade battle. Beware the Canadian dairy lobby!

WASHINGTON — President Donald Trump turned a simmering dispute between the US and Canada into an open confrontation on Tuesday, announcing a 20% tariff on Canadian softwood lumber imports and threatening in a tweet to go after the Canadian dairy industry.

Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!

The Trump administration argues the tariffs, which can hit a maximum of 24%, are a response to Canada illegally subsidizing its lumber industry. Canada denies it does any such thing. And while the tariffs are a new, and not entirely shocking, development in a trade dispute that dates back to the 1980s, there are signs this could be a step towards a broader trade war between the two nations.

After a friendly meeting in Washington earlier this year with Canadian Prime Minister Justin Trudeau, Trump said he was mostly happy with Canadian trade and just wanted to make some tweaks to the North American Free Trade Agreement (NAFTA).

But now — with plans for a wall with Mexico hitting obstacles — he’s expressing broader ambitions for the Northern border.

On Tuesday Trump tweeted about Canada’s closed dairy market that protects Canadian producers of milk and cheese by strictly limiting foreign imports. Trump wants American farmers to no longer be shut out from the Canadian market. “We will not stand for this. Watch!” he warned.

That move would give American farmers access to a new multi-billion dollar market, and would likely provide cheaper milk for Canadian consumers. But it would also take on the politically powerful Canadian dairy industry, which will fight viciously to hold on to its monopoly.

The dairy industry is a club of about 12,000 dairy farms that wield immense power in Canadian politics. The protectionist system of price controls — known as supply management — is one of the sacred cows of Canadian trade policy.

The Canadian government has recently pledged hundreds of millions of dollars to appease the dairy industry because a negotiated free trade deal with Europe would allow new imports of European cheese. That contentious deal still leaves domestic dairy farmers in control of 96% of the Canadian market.

In other words, if you want to start a trade war with Canada, go after the dairy industry.

The questions now are how Canada reacts and whether the relationship continues to sour. Canada is the largest consumer of US exports, taking in $280 billion per year. Canada also sends $295 billion in goods back to America, more than any country other than China.

Canada has vowed to fight the new softwood lumber tariffs. On Monday Natural Resources Minister Jim Carr called them “unfair and punitive” and dismissed Trump’s subsidizing allegations as “baseless and unfounded.”

Canada exports about $6 billion worth of lumber to the United States every year, or about 30% of America’s softwood lumber market. Carr said that tariffs on Canadian wood will jack up the price of new homes and jeopardize thousands of homebuilding jobs. He also threatened to sue.

“The Government of Canada will vigorously defend the interests of the Canadian softwood lumber industry, including through litigation,” he said in a statement. “We have prevailed in the past and we will do so again.

The heart of the dispute is that most Canadian lumber is harvested from public land at regulated prices. The American industry relies mostly on harvesting from higher-cost private land. Lobby groups like the US Lumber Coalition argue this allows Canadian companies to flood the US market with artificially cheap lumber, which is a breach of NAFTA. But both the World Trade Organization and NAFTA dispute panels have ruled in Canada’s favor.

Late Tuesday, Trump and Trudeau released statements regarding a conversation they had by phone that day. Trump's statement was brief, acknowledging they discussed dairy and lumber and describing it as "a very amicable call."

President Donald J. Trump and Prime Minister Justin Trudeau spoke today. The two leaders discussed the dairy trade in Wisconsin, New York State, and various other places. They also discussed lumber coming into the United States. It was a very amicable call.

Trudeau's statement went into greater detail about the conversation, saying they agreed that the trade relationship was mutually-beneficial for both countries and elaborating on how much Canada imports from the US.

The Prime Minister and the President reaffirmed the importance of the mutually-beneficial Canada-US trade relationship. On the issue of softwood lumber, the Prime Minister refuted the baseless allegations by the U.S. Department of Commerce and the decision to impose unfair duties. The Prime Minister stressed that the Government of Canada will vigorously defend the interests of the Canadian softwood lumber industry, as we have successfully done in all past lumber disputes with the US. The two leaders agreed on the importance of reaching a negotiated agreement, recognizing the integrated nature of the industry between Canada and the United States.

The Prime Minister and the President also discussed Canada-US trade in dairy products, trade which heavily favours the US: Canada imports over $550 million of dairy products from the US, but exports just over $110 million to the US. The Prime Minister reaffirmed that Canada upholds its international trade obligations, including the North American Free Trade Agreement, under which the US continues to have duty-free and quota-free access for milk protein substances, including diafiltered milk, and that Canada would continue to defend its interests.

The Prime Minister and the President agreed to continue their dialogue on these important bilateral issues.

The door was left open for this new dispute by the inaction of the Obama administration. The last lumber deal between the two countries was reached in 2006 and expired in October of 2015. Not wanting to touch the hot button issue in the final months of his administration, Obama let the deal expire without a replacement.

While the lumber and dairy disputes represent billions of dollars in their own right, they can be isolated battles. If Trump does re-open NAFTA for negotiation, as promised, then the entire trade relationship between the two nations (plus Mexico) is on the table.

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