Fraser Forum

21st century economies fight over a 20th century industry

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Last month, President Trump imposed a 25 per cent tariff on steel and steel products, and a 10 per cent tariff on aluminum. Initially the tariffs applied to all foreign producers exporting those products to the United States. But Trump subsequently exempted steel and aluminum imports from several countries including Canada.

However, the exemptions are temporary and, in the case of Canada and Mexico, they appear to be contingent on the outcome of ongoing NAFTA negotiations. The precise nature of the contingency was left unclear by the Trump administration.

Perhaps there will be an explicit “carve out” from tariffs for steel if NAFTA is successfully renegotiated? Perhaps the exemption of the U.S. tariff on Canadian steel exports will be rescinded immediately upon an unsuccessful outcome of NAFTA negotiations?

As with so many of Trump’s policy actions, the details of the steel tariff seem to be made up on-the-fly and with little regard for how that action will affect the stability of the international trade regime. A very worrisome feature of the U.S. steel tariff (as well as other trade actions taken by the Trump administration) is that the tariffs are being imposed unilaterally and without any seeming concern for whether or not they are consistent with World Trade Organization (WTO) rules. President Trump’s disregard for the legality of his government’s trade actions reflects his public criticism of trade agreements, particularly the dispute resolution process administered by the WTO.

The president’s fixation on encouraging increased U.S. production of steel (and iron) products seems to have infected state government politicians in the U.S. as well. A number of U.S. states have enacted their own laws restricting the use of foreign-made steel in government construction projects. Notably, in the state of New York, a newly enacted law will require U.S.-made iron and steel to be used in highway and bridge projects in that state for a two-year period. In retaliation, the Ontario government enacted the Fairness in Procurement Act, 2018, which allows that province to designate a U.S. state or local government as an “offending American jurisdiction.” Based on an offending jurisdiction designation, Ontario can impose penalties on suppliers from the jurisdiction.

Sure enough, last week Ontario Premier Kathleen Wynne announced that Ontario will no longer accept procurement contracts with suppliers from New York and will restrict supplier use of structural iron from that state. Premier Wynne said that in “the face of unfair U.S. actions, I will stand up for the people of Ontario in every way possible, every time.”

These are fine fighting words, but Ontario is likely violating WTO rules with its action. While trade experts suggest that U.S. states likely enjoy a “carve-out” for procurement of construction-grade steel under the WTO’s General Procurement Agreement (GPA), it’s less likely that Canadian provinces enjoy the same exemption.

However, provinces such as Ontario could implement regulations that would exempt procurement covered by the GPA from trade law sanctions.

Whether and how Canadian provincial governments can gain exemptions from the GPA or other trade treaties arguably obscures a bigger issue: should Canadian federal and provincial governments respond to trade actions undertaken by U.S. federal and state governments by retaliating in-kind?

Retaliating before taking a complaint to the WTO undermines the dispute resolution process that Canada has strongly (and appropriately) championed. The spectacle of governments trashing the international trade regime over domestic steel production is bewildering. Direct employment in the steel industry in both the U.S. and Canada is about one-tenth of one per cent of the adult work forces in both countries.

Canadian government leaders should ask themselves whether it’s worth compromising international trade arrangements that have served Canada well for decades to protect domestic industries that employ a handful of workers.