Aluminum and steel users disappointed with imposition of hefty U.S. tariffs
The Canadian PressIndustry Machinery and Equipment Maintenance Manufacturing
Consumers on both sides of the border could be caught in the middle of a trade war as businesses slap them with higher prices to offset the impact of billions of dollars worth of reciprocal tariffs announced by the United States and Canadian governments.
The federal government announced Thursday afternoon that it would impose some $16.6 billion in dollar-for-dollar counter-tariffs on a wide variety of United States goods – everything from whiskey to sleeping bags to quiche – that will take effect on Canada Day.
“This is the strongest trade action Canada has taken in the post-war era,” Foreign Affairs Minister Chrystia Freeland told a news conference Thursday.
The swift Canadian response came hours after U.S. Commerce Secretary Wilbur Ross said exemptions for Canada, Mexico and Europe from import duties of 25 per cent on steel and 10 per cent on aluminum will expire Friday, as scheduled.
The tariffs from both countries are not conducive to a good trade environment, Bank of Canada deputy governor Sylvain Leduc told reporters after a speech in Quebec City.
“This is a risk that we’ve highlighted in our monetary policy report in the past, the risk of protectionism and the fear of the tit-for-tat responses,” he said.
But figuring out who is worse off could be complicated given the level of integration between the two economies.
Canada and the U.S. are closely integrated trading partners and Thursday’s moves could cripple industries, including the auto sector, where supply chains are interconnected and goods pass back and forth across the border several times before they are finished.
“Because of the deep integration of manufacturing supply chains, the tariffs will drive prices up for all consumers,” said Dennis Darby, president of the Canadian Manufacturers & Exporters.
Steel and aluminum, for instance, are used in so many industries that tariffs will boost input costs in sectors from food and beverage manufacturing to aerospace, and producers will likely try to pass along the tariffs to consumers in the form of higher prices.
The United States used 5.5 million tonnes of aluminum last year, largely imported from Canada, but only produced about 700,000 tonnes domestically.
“Construction, autos and machinery manufacturing comprise 80 per cent of total domestic steel consumption and their input costs would rise. With costs going up, jobs and prices would take a hit,” said Michael Burt, the Conference Board of Canada’s executive director of industrial economic trends.
A 10 per cent tariff that Canada imposed on many U.S.-made retail goods will be levied at the wholesale level, but over time for products with no other substitutes, such as orange juice, this cost will trickle down to consumers, said Karl Littler, vice-president of public affairs for the Retail Council of Canada.
“Retail margins are narrow. So at some point it would have an impact on price,” he said.
“Most of this stuff in this space, clearly, is substitutable…. Inevitably, if you’re absolutely bound and determined to get that particular bourbon, from that particular distillery in Kentucky, then there will be a price impact.”
Sven Anders, an associate professor in food marketing and supply chains at the University of Alberta, said he expects most of the companies producing food on the tariff list would pass along the costs to shoppers because retailers have a lot of power in setting prices and shoppers don’t often push back.
“Consumers are not in a bargaining position in the retail market,” he said. “Consumers are known to be a very heterogeneous group and they don’t really act as a powerful body in saying we are not going to pay these tariffs.”
However, passing on price increases could be challenging in sectors like beer, which use aluminum for cans because demand is soft and competition is fierce, said Molson Coors Brewing Co. analyst Brittany Weissman of Edward Jones.
Weissman said most companies have some breathing room because of hedging contracts that protect them from wild price swings. But aluminum prices have already risen as buyers have hoarded the material.
The U.S. Beer Institute said Thursday its members, which include Denver and Montreal-based Molson Coors, are united against the tariffs on imported aluminum.
“These tariffs are a new US$347 million tax on the U.S. beer industry,” CEO Jim McGreevy said in a statement.
“Over the long run, these tariffs will drive aluminum prices higher globally, increasing the cost of beer production for all brewers. The tariffs are already having an immediate and disproportionate impact on American brewers and American jobs.”
Faced with thin margins, automakers will have to make a difficult choice: Pass along the 25 per cent tariff on steel and 10 per cent rate on aluminum and risk getting stuck with inventory, or absorb the increases and reduce profits, said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association.
Public companies may feel pressure from shareholders who would expect them to fight the U.S. government in court and get an injunction, he said in an interview.
“There’s a whole bunch of scenarios, none of which makes American automakers more competitive,” he added.
“On a long-term basis, if you’re raising the price of probably the biggest raw material input in a vehicle, you’re going to make any production of vehicles in Canada and the U.S. less competitive against foreign manufacturers and it might suddenly make Asian imports more attractive to consumers.”
The impact of the tariffs will likely be “small,” only affecting 0.8 per cent of annual Canadian output, TD senior economists said in a note.
However, they warned that the imposition of the tariffs “dents confidence,” and could result in the delay or cancellation of new investment in the countries affected and might increase consumer price inflation.
“The probability of a cold trade war turning hot has now risen, but still remains a worst case scenario.”
By Ross Marowits, with files from Armina Ligaya and Tara Deschamps in Toronto