An employee pours a glass of Double Cask single malt whisky for tasting at the Sullivans Cove whisky distillery in Hobart, Tasmania, Australia. (Photographer: Carla Gottgens/Bloomberg)

Canada Targets Whiskey, Toilet Paper in Trump Tariff Fight

(Bloomberg) -- From mustard to motorboats, Canada’s firing back against Donald Trump on its national holiday.

Prime Minister Justin Trudeau will mark Canada’s 151st birthday Sunday by imposing tariffs finalized Friday on about C$16.6 billion ($12.6 billion) worth of U.S. imports in response to American levies on Canadian steel and aluminum that went into effect a month ago.

While the tariffs alone are unlikely to derail Canada’s expansion or boost overall inflation, they add to the growing tension between two of the world’s biggest trading partners. Talks over a new North American Free Trade Agreement have stalled, and Trump has threatened to impose additional duties on autos. Canada, meanwhile, is preparing fresh duties as early as next week on non-U.S. steel imports to prevent dumping.

“It’s regrettable that we have to engage in this kind of tit-for-tat trade war, but it’s been forced on us by Mr. Trump,” Toronto-based trade lawyer Lawrence Herman said in a phone interview. “Canada has no choice but to respond in accordance with the rules of international trade."

Trudeau will lead the Canada Day festivities by visiting a pair of trade battlegrounds Sunday: a southern Ontario town near the U.S. border once famous for Heinz ketchup, and a steel mill in Saskatchewan, meeting with workers in each.

The prime minister’s tariffs on U.S. goods cut a broad swath from steel and aluminum to whiskies, toilet paper, washing machines, motorboats -- even maple syrup. The duties will be 25 percent on steel and 10 percent on everything else. The government had initially identified potential tariffs on C$19.4 billion in goods before paring down the list after consultation. The final tariff list was revealed Friday, removing items like beer kegs and mustard, along with C$2 billion in support for the domestic steel and aluminum industries.

Read more about Canada’s efforts to prevent steel dumping

The tariffs are overwhelmingly popular in Canada, according to most polls, but come with unease as prices may rise on hundreds of goods.

Scott Brundle, dealer principal for sales at Town & Country Marine in Lakefield, Ontario, said the tariffs on boats will lead to sticker shock for buyers.

“It will dramatically affect our business,” Brundle said, adding that inventory levels are lower than he’d prefer as he cuts orders and works with suppliers to find ways to make sales viable. U.S. manufacturers that sell in Canada include Larson Boats of Minnesota and Brunswick Corp. of Lake Forest, Illinois.

“We’re gonna kick the can down the road,” Brundle said. “We’ll get some inventory in here to fill the showroom up, and pay the tariff to have them on display, and then we’ll take orders. From there, what we charge on the orders, I don’t know.”

Higher Costs

The tariffs could add C$10,000 to the cost of a wakeboard boat from Malibu Boats Inc. of Tennessee. Brundle has three of them on order for July. “So do the math. It’s going to be C$30,000 to C$40,000 cash in tariffs on those three boats,” he said.

Still, the economic impact of the latest tariffs fight is minimal compared with a pair of other looming Canada-U.S. trade issues: potential auto tariffs, and threats to end Nafta. Trump and Trudeau have clashed recently, with the president warning Canada will pay for it.

“If they said tomorrow those auto tariffs are in place, it becomes a meaningful hit,” said Mark Chandler, head of fixed-income research at RBC Capital Markets. “People are more worried about what happens to autos.”

Linda Hasenfratz, chief executive officer of autoparts maker Linamar Corp., went further, saying it would be the “next and final step to economic disaster.”

“Tariffs are never good, add cost that ultimately hits the consumer and therefore hammer the economy,” she said, adding that U.S. metal tariffs are already raising costs for the auto industry that will ultimately lead to layoffs. Linamar’s stock fell to a 14-month low in Toronto Thursday.

Sky High

There are mixed views on how quickly Canada should proceed with its retaliation. Canada’s biggest steelmaker, a unit of ArcelorMittal, has warned 1,000 direct jobs are at risk from the U.S. levies. Ken Neumann, the United Steelworkers’ national director for Canada, told lawmakers this week he was “very concerned that the Canadian industry has already been harmed by the one-month delay.”

But others worry the government is moving too fast.

Domestic steel construction companies across the country are anticipating price hikes from Canada’s retaliatory tariffs, as competition and supply of steel in the market continues to drop.

“We saw the U.S. prices go sky-high, which had an impact on pulling Canadian prices up,” said Tim McMenamin, vice president at Ferrostaal Steel Canada Inc., a rebar importer. Retaliatory tariffs will push prices even higher, he said.

Bear Poke

“If I had a message for the federal government today, it would be look before you leap,” Manitoba Finance Minister Cameron Friesen said in Ottawa during a meeting of provincial finance ministers. It’s a view echoed by one business owner during lawmakers’ hearings.

“I believe Trump is a bear, we shouldn’t be poking him too much, the bear will start roaring,” said Bob Verwey, president of Owasco Inc., an auto and RV sales company.

The direct economic impact from the U.S. metal tariffs and Canada’s retaliation -- either in terms of economic activity or inflation -- are expected to be small. Jean-Francois Perrault, chief economist at Scotiabank, expects a “maximum” 0.1 percentage point hit to growth, and less than a 10th of a percent on inflation.

“Our sense is that the impact on the economy will be small, but could be
substantial for the steel industry over time,” said Perrault, adding the outcome of Nafta negotiations remains the central question on trade for Canada.

China Effect

Steel costs may rise further if Canada follows through on plans to impose tariffs and quotas on non-U.S. imports from China and other countries. The measures may be announced as early as next week, people familiar with the plans said. Finance Minister Bill Morneau said his government will “absolutely” stand behind companies affected by metal tariffs.

Canada also faces risks from the U.S.-China trade dispute. Canada sends three quarters of its exports to the U.S., so any slowdown in American growth will impact Canada. At the same time, it’s a major oil producer and any Chinese slowdown could crimp demand.

“If you get a major trade war, the probability of recession is real,” said Perrault.

©2018 Bloomberg L.P.

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