Nearly a month after the U.S. initiated tariffs on steel and aluminum and Canada responded with retaliatory duties against American goods, trade lawyers say there is no way to predict just how far the effects of the dispute will reach.
“It's like pulling a string here, and then the sweater unravels on the other end,” says Milos Barutciski, partner at Borden Ladner Gervais LLP. “Unintended consequences are immense and unpredictable.”
Businesses that have invested on a long-term basis are seeing the constellation of trade agreements and trade relations called into question, he says.
The entire system is being undermined and businesses are asking themselves if their products or the materials they use are going to be part of a tariff or retaliation by some actor in this drama, says Barutciski.
“The problem is supply chains are so interwoven both across sectors and across borders . . . that when you start questioning the whole foundation, you risk disruptions that you never thought for a moment would occur. And that’s what a lot of companies are now looking at . . . The concern is that they don’t know how this is going to impact them,” he says.
Clients have to prepare for and allocate the cost of additional tariffs as well as potential safeguards that may be instituted by the Canadian government, if the trade war escalates, says Matthew Kronby, partner at Borden Ladner Gervais LLP.
For those who are not locked into contracts, they are trying to renegotiate terms and pass along costs, he says.
“It’s very difficult for clients to make long-term or even medium-term business plans when there's this much uncertainty in the market for trading goods specifically, but also the broader and economic uncertainty is clearly weighing on them,” he says.
On a sector level, businesses are “heavily engaged” with the Canadian government on possible safeguards, asking for product exclusions from subsequent retaliatory tariffs and many are making plans to outsource operations to “more competitive markets,” Barutciski says.
Earlier this week, Harley-Davidson, Inc. announced that it is shifting some production of motorcycles headed overseas from Milwaukee, Wisc. to Europe to avoid a $2,200-per-bike tariff, which was the EU retaliation for the U.S. steel and aluminum tariffs.
As the U.S. closes its doors to international steel, the influx of foreign steel trying to come to Canada may create the need for a “safeguard action” to keep the steel out of Canada, which Barutciski says he expects in coming days. It is legal under NAFTA for a country to impose tariffs “in the face of a surge of imports of a particular product that are injurious or potentially injurious to domestic industry,” he says.
Mark Warner, principal counsel of MAAW Law, advises clients on international competition, foreign investment and international trade and says that Canadian officials are being uncommonly bold in their response to the U.S. tariffs.
In response to the 25-per-cent and 10-per-cent tariffs on steel and aluminum, Prime Minister Justin Trudeau and Foreign Affairs Minister Chrystia Freeland announced $16.6 billion in tariffs on U.S. products for what they said was a proportional retaliation.
“I think that on a more practical business level people realize that Canada can't win a trade war with the United States notwithstanding what politicians might say,” says Warner.
He says actions from the Canadian government are a “high-risk strategy.”
The people who will be hurt by these actions “. . . are not going to be retired bureaucrats or people in the faculty common room; they’re going to be people actually making things and trying to sell things,” he says.
Warner says what is unprecedented is the Canadian response. Whereas Canada went to the World Trade Organization before with its complaints before retaliating, this time the federal government skipped the first part of that process.
“We've never really seen a Canadian government say: ‘Forget the process, forget the WTO, we’re just going to retaliate tit for tat,’” he says. “That’s a totally new world.”
While the tariff war heats up, Canada, the U.S. and Mexico are still in negotiations for NAFTA, with little progress. Recently, the demand from the U.S. of a five-year sunset clause, was greeted by Canada as a deal breaker.
Making few gains on NAFTA talks does not create an immediate commercial problem because the deal stays in effect during negotiations but adds to the long-term uncertainty of whether the U.S. will pull out of the deal, Kronby says.
But he says the U.S. is trying to “essentially neuter” NAFTA’s dispute settlement mechanisms, which makes the deal “essentially worthless for long-term business planning.”
Also complicating the negotiations is the upcoming Mexican election.
Andrés Manuel López Obrador of the movement for national renewal is ahead in the polls. Kronby says the new administration likely will not be prepared to make significant concessions to the U.S. on things such as the so-called "rules of origin" requirements. Mexico has argued that a higher percentage of the contents of vehicles should have to be made in a NAFTA country for an automobile to be tariff-free.
“President Trump is exceptionally unpopular in Mexico and it’s difficult to see an incoming president taking steps to accommodate the Trump administration to wishes with respect to trade or any of a number of other policy areas,” he says.
Getting a NAFTA agreement concluded before the U.S. midterm elections this November will be “virtually impossible,” says Kronby.
While many in the media portray Obrador as a populist à la Trump, Barutciski says that this is because of “campaign talk.”
“I don't expect a radical,” he says.