The Impact of May 2018 Tariff Actions on Canada and the US: Comprehensive Analysis and Economic Insight

Introduction

The announcement of tariff actions in May 2018 between Canada and the United States has sparked a heated debate on its potential ramifications on both nations' economies. While some believe these actions will have a significant adverse impact, others argue that the long-term consequences may not be as dire as initially perceived. This article provides a detailed analysis of the economic implications, focusing on tariffs, trade imbalances, and geopolitical considerations accompanying these actions.

Underlying Trade Imbalances and Their Historical Context

The conflict between the US and Canada on tariff actions has roots in broader economic and geopolitical issues. As stated by Douglas Irwin, an economist, 'It’s unprecedented to have gone after so many U.S. allies and trading partners, alienating them and forcing them to retaliate.' This highlights the scale and unprecedented nature of the actions taken.

The US has traditionally benefited from trade imbalances, which allowed it to maintain a dominant position in global economic affairs. By establishing markets for its goods and securing favorable terms, the US has often relied on trade imbalances, particularly with countries like Canada. This imbalance, however, is not just about economics; it has also played a critical role in establishing the USD as a reserve currency and ensuring geopolitical stability through military alliances.

The question arises: how will these tariff actions affect the balance of power? Despite the initial anger and retaliatory measures, it is crucial to consider the long-term implications. The US remains the world's largest consumer market, which provides leverage for negotiating trade deals.

Impact on Canadian and American Economies

Immediate and short-term impacts on both economies are expected, particularly in the form of increased costs for consumers. For instance, if Walmart and similar large retailers exert pressure for better pricing due to the vast quantity of products they purchase, this can lead to significant changes in trade dynamics. Such actions have the potential to alter consumer behavior and business relationships on both sides of the border.

However, from a longer-term perspective, the situation might not be as bleak for both nations. As mentioned, many Canadians with US investment portfolios may see their net worth increase due to eventual market adjustments. Trudeau's economic policies and the resilience of both economies may allow for adaptation and recovery.

Geopolitical and Global Impact

The controversy extends beyond immediate bilateral impacts. Other global economies, particularly Europe and Mexico, will experience ripple effects from these tariff actions, leading to economic disruptions. Political damage is evident, as even close allies like Canada expressed dissatisfaction with the US approach.

The conflict also challenges the traditional dynamics of global trade, where the US plays the role of the "whipping post." This crackdown on trade deficits, which hit over half a trillion dollars annually, is not aimed at completely eliminating the deficit but at balancing trade and improving the economy's overall health.

The velocity of money, a key economic concept, explains how reducing trade deficits can stimulate economic growth. By cutting the deficit in half, the theory goes, the economy will gain a significant boost.

Conclusion

In conclusion, while the May 2018 tariff actions between Canada and the US may lead to some economic adjustments in the short term, the long-term impact may be mitigated by strategic economic policies and the inherent resilience of both economies. As the US reasserts itself in the global trade landscape, the implications for Canadian and American economies, and indeed the world, will likely be a period of adjustment and recovery.