The two ways Trump's tariffs on Canada could collapse — despite his fight to keep them

WASHINGTON, D.C. — Time’s up. On Friday, U.S. President Donald Trump raised the tariff rate on Canadian goods not covered under the Canada-United States-Mexico Agreement (CUSMA) from 25 to 35 per cent, saying they “have to pay a fair rate.” The White House claims it’s because of Canada’s failure to curb the “ongoing flood of fentanyl and other illicit drugs.” U.S. Customs and Border Protection (CBP) data, however, show that fentanyl seizures from Canada make up less than 0.1 per cent of total U.S. seizures of the drug; most smuggling comes across the Mexican border.

But the future of Trump’s policy also rests on shaky ground, and the tariffs could come crashing down even if Canada can’t reach a deal at some point. Imposed through a controversially declared “national emergency” under the International Emergency Economic Powers Act (IEEPA), the tariffs come with essentially three paths for relief to Canadian exporters and their American customers: the courts and the economy.

And there’s always the wildcard: that the president changes his mind.

Without relying on that, National Post looks at two very possible ways out of all this:

The courts:

There is a big question hanging over whether Trump’s tariffs are even legal under the U.S. Constitution, which gives Congress powers over trade. Trump has bypassed that by claiming he’s using presidential IEEPA emergency powers.

On Thursday, the Washington, D.C.-based Federal Circuit Court of Appeals convened an en banc hearing for oral arguments in challenges to Trump’s use of IEEPA. The 11 judges questioned whether the law meant for sanctioning adversaries or freezing assets during emergencies grants Trump the power to impose tariffs, with one judge noting, “IEEPA doesn’t even mention the word ‘tariffs.’” The White House, meanwhile, says the law grants the president “broad and flexible” emergency powers, including the ability to regulate imports.

“Based on the tenor and questions of the arguments, it appears that the challengers have the better odds of prevailing,” Thomas Berry, the CATO Institute’s director of the Robert A. Levy Center for Constitutional Studies said in a statement. “Several judges peppered the government’s attorney with skeptical questions about why a broad term in IEEPA like ‘regulate importation’ should be read to allow the president to unilaterally impose tariffs.”

Trump’s lawyers claim his executive order provides the justifications for the tariffs — in Canada’s case, fentanyl. But Berry said “those justifications would not matter if IEEPA simply does not authorize tariffs in the first place. That is the cleanest and simplest way to resolve this case, and it appears that the Federal Circuit may be leaning toward that result.”

A decision is expected this month, and if it’s a resounding pushback from the judges’ panel, said Andrew Hale, a senior policy analyst at Heritage Foundation, the Supreme Court may not even take up the case. If so, he says, “these Liberation Day tariffs and everything that’s been imposed under emergency legislation, IEEPA, that all evaporates.”

At that point, the White House would not be able to declare across-the-board tariffs against countries. Instead, it would have to rely on laws allowing tariffs to be imposed on specific products that are found to threaten U.S. national security, like those currently imposed on Canadian steel and lumber.

The economy:

The other path to tariff relief is through economic pressure. If Americans start to see higher prices and economic uncertainty, and push back at the ballot box — or threaten to do so — it could force Trump to reverse course.

The most recent figures show that U.S. inflation, based on the Consumer Price Index, hit around 2.7 per cent in July. That’s a slight rise, fuelled by rising prices for food, transportation, and used cars. But it’s still close to the Federal Reserve target of 2 per cent.

U.S. unemployment rose slightly to 4.2 per cent in July, while far fewer jobs were created than expected, and consumer confidence rose two points but is still several points lower than it was in January.

Overall, most economists agree that risks of a U.S. recession over the next 12 months are relatively low, but skepticism over growth remains high. “Our outlook is for slower growth in the U.S., but no recession,” said Gus Faucher, chief economist of The PNC Financial Services Group. He notes that the “tariffs are going to be a drag” because they are a tax increase on imports.

Economists have said price inflation from tariffs is not yet being felt in the U.S., but believe it’s inevitable. “Trump’s tariff madness adds a great deal to the risks of a recession,” said Steven Hanke, professor of applied economics at Johns Hopkins University who served on President Reagan’s Council of Economic Advisors.

“With tariffs, Americans are going to be paying a big new beautiful sales tax on goods and services imported into the U.S., and taxes slow things down. Taxes don’t stimulate.”

It is surprising that higher U.S. prices haven’t happened yet, said Jonathan Gruber, chairman of the economics department at the Massachusetts Institute of Technology. But he explained that it’s likely a reflection of the duration of contracts and the fact that import sellers haven’t yet put up prices — “because they were hoping it wouldn’t be real, like they’d wake up from this nightmare.”

“I think we start to see the effect on prices by the end of the year,” said Gruber.

The trouble for Canada, however, is that the Canadian economy is starting from a much weaker position, with higher unemployment, lower consumer confidence, and a slowing GDP, on top of the trade tensions. So, trying to wait things out for the U.S. to feel the pinch will be even more painful for Canadians. And any American downturn will also reverberate north.

“As Uncle Sam goes, so goes Canada,” said Hanke.

Gruber agrees with that, but with a caveat. “It’s all bad in the short run and good in the long run,” he says. He believes the U.S. is “weak and getting weaker” and that Canada should start taking advantage of how the U.S. is making opportunities for other countries to invest in themselves.

“We’re not investing in our future. We’re killing our education. We’re killing our research. We’re not allowing in immigrants,” he said, explaining the weakening of the U.S. economy. “We’re basically setting the stage for long-run economic slower growth.”

Meanwhile, China is doubling down on investment, research and other longer-term policies.

“Canada and other countries need to do the same,” Gruber said.

And as for when a backlash could lead to a reversal in the U.S., Gruber points to two factors.

“It’s got to be high inflation, and Trump’s opponents need to make sure that the voters understand that’s Trump’s fault.”

National Post

tmoran@postmedia.com

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