Trump’s Tariff Tiff

Did the Trump Administration just fire an opening shot in a trade war with our neighbors to the north? Some media believe so after Commerce Secretary Wilbur Ross announced a 20% tariff on Canadian softwood lumber (used frequently in single-family homes). Many wonder what this all means, from US home builders worried about higher costs to dairy farmers who have soured on their own Canadian trade barriers. However, while markets frequently frown upon tariffs and other protectionist policies, this episode seems more like hot rhetoric and politicking rather than a prelude to a global trade issue with yuuuuuge negative fallout.

Lumber disputes between the US and Canada aren't exactly new. In 2006, the countries reached an uneasy peace after decades of disputes.^[i] The US returned about C$4 billion of C$5.3 billion in tariffs collected from Canadian producers since 2002 and ceased imposing additional duties. In exchange, Canadian producers agreed to cap exports or else pay a tax on goods shipped to the US. However, this agreement expired in late 2015, and tensions have been on the rise. Last fall, the US Lumber Coalition filed a complaint with the Commerce Department, accusing Canadian producers of dumping softwood lumber into the US market-and setting the stage for the Commerce Department's announcement. Adding to the contentious environment, Trump criticized the Canadian dairy industry last week for shielding its farmers from US competition. And the North American Free Trade Agreement (NAFTA) remains a touchy subject as well.

For all the speculation, however, a tariff against Canadian lumber isn't in effect yet-there is a process! First, the Commerce Department will research the matter and determine whether to enact a tariff by September 7. If they decide to do so, and the US International Trade Commission affirms the ruling, the US will issue tariffs ranging from 3% - 24% on offending Canadian exporters. However, while this is making headlines now, it isn't sudden. US lumber companies warned last year they would request anti-dumping duties, so now we at least have some clarity on that front-and based on market reaction, the results weren't as bad as expected. Also, Canada will probably contest,^[ii] so a final resolution isn't likely any time soon.

While this brouhaha has sparked concern among US homebuilders and trade advocates alike, some scaling is in order. For builders, the National Association of Home Builders says Canadian imports represent about 28% of all softwood lumber purchased in the US-not insignificant since softwood lumber is a major component in single-family home construction. However, while this may add to builders' costs, don't overstate the broader economic impact. Residential investment (which includes new home construction) comprises 3.8% of America's $18.6 trillion economy.^[iii] Single-family homes in particular? 1.3%.^[iv] Builders may feel pinched, but this isn't a major economic headwind.

On the trade front, Canada is a major partner, trailing only China in US total trade share at 15%. However, Canadian lumber (including softwood) amounted to $5.8 billion-or 2.1%-of the US's total Canadian goods imports in 2016 and a mere 0.3% of total goods imports.^[v] However you slice it, the impact isn't huge. This doesn't make a lumber tariff good, by any means. Duties hurt the freer movement of goods and services and always risk retaliation-bad! However, don't overhype the risk: This announcement was neither surprising nor destructive enough to wallop the US and/or Canadian economies, let alone the global one.

Moreover, tariffs aren't a new phenomenon exclusive to Trump. Other administrations have imposed them, all ostensibly to protect American interests. President Nixon imposed a 10% tariff in 1971 to protect American products from "unfair exchange rates." President George W. Bush implemented steel tariffs in 2002 to protect domestic producers. President Barack Obama wielded his fair share of tariffs, hitting Chinese tires in 2009, solar panels in 2012 and steel in 2014. Heck, he even levied tariffs against the Canadians, too (on glossy paper)!^[vi] None of these moves portended a destructive global trade war, and we don't see one resulting from this Canadian tariff tiff, either. 1930's Smoot-Hawley this is not.

Trade has been a prominent theme throughout Trump's first 100 days, as he campaigned on ripping up "bad deals" and renegotiating "better ones." However, details have largely been scant, and concrete action has yet to replace bombastic rhetoric. A microcosm: On Wednesday, a Trump administration official supposedly leaked that the White House was considering withdrawing from NAFTA, which would affect trade relations with both Canada and Mexico. Yet by midnight, Trump had killed the rumor and said negotiations were forthcoming. For now, Trump trade policy doesn't look likely to threaten the global expansion or bull market.