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William Watson: Armageddon postponed, now back to dairy quotas and CUSMA

We won't get a trade deal without dairy concessions and that means compensating farmers even if it's not legally required

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Now that Armageddon has been postponed for a couple of weeks, we might use the breathing space to think for a minute about more mundane matters, such as the future of Canada-United States trade, which is up for renegotiation just weeks from now.

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President Donald Trump was very gracious about Canada in his telephone chat with the four Artemis astronauts, including our own Jeremy Hansen. A president’s lot is such a varied one! Chatting with moon-travellers. Rescuing downed pilots. Kicking off the White House Easter egg hunt. Deciding the fate of civilizations.

Given the president’s overall annoyance with us, you might have thought he’d suggest to the three American astronauts they boot Hansen out of their Orion capsule and leave him on the far side of the moon. Instead he praised Hansen’s courage, bravery, brilliance and even genius, and did not ask him to confirm that from space you can’t actually see the Canada-U.S. border, which as Trump always insists, was just drawn on the map arbitrarily. So: good for the president.

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Will he be as kind, however, when it comes time to talk the details of trade? And what mood will he be in if the Iran denouement ends up solidifying the position of a new Iran government (not regime) that, though badly pummelled, ends up with explicit control of the Strait of Hormuz? Geography has always given Iran implicit control but only existential desperation has caused its exercise. It is not unknown for Trump to take out his frustrations by beating up on lesser powers, such as us.

The future shape of the North American car industry is one key issue in the CUSMA negotiations. Since 1965’s Auto Pact, parts and cars have crossed the border tariff-free so long as they satisfy content requirements. The Trump administration seems likely to want to reimpose permanent tariffs. A new study by three MIT economists suggests doing so would impose net costs on the U.S. economy, though mainly if the tariffs extend to parts.

The three — Luke Heeney, Jasdeep Mandia and Christopher R. Knittel — modelled the U.S. auto market in what, when you take into account all the different models and trims sold by more than three dozen manufacturers, is forbiddingly intricate detail. It’s also very transnational. Almost half of vehicles sold in the U.S. are assembled abroad, while even those assembled in the U.S. use foreign parts. For the purposes of this study it’s interesting that Canada is not regarded as foreign: U.S. law only requires companies to report how much of their content originates from the U.S. and Canada together. That presumably will change after this summer.

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The MIT researchers found that a car-only tariff increases the market share of U.S. producers by a little under six per cent, which raises their profit by about US$1 billion — essentially nothing in a US$31-trillion economy. Consumers are worse off by US$14 billion but that’s offset by tariff revenue of the same amount. If you like consumers more than you do government employees, you’ll consider that a net loss — though government employees do include NASA astronauts and maybe that affects your balance-taking.

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On the other hand, if the tariff is also imposed on imported parts, the cost to consumers doubles, though so do tariff revenues, while the US$1-billion gain to producers turns into a US$2.6-billion loss. Strangely, the loss falls more heavily on Chevrolet, GMC and Ford than on Honda and Toyota. Foreign content varies between 25 and 90 per cent across vehicles and it turns out these big U.S. firms rely on it more and so are hit harder. Who knew?

These details of tariff incidence in the U.S. auto industry aren’t likely to trouble President Trump. But he does know about Canadian dairy — which is to negotiations with Canada what uranium enrichment is to negotiations with Iran: i.e., no deal on dairy, no deal period.

A recent decision by the Quebec court of appeal on taxi licences may give Ottawa a little extra leverage in getting dairy farmers to go along with a reduction of tariffs on their U.S. competition. Montreal taxi drivers argued that reforms introduced in 2019 effectively destroyed the value of their taxi licences and so they were owed compensation for what amounted to policy-driven expropriation of their private property. A lower court agreed with them but now the court of appeal has sided with the government: governments have to be free to withdraw privileges previously granted even if doing so imposes an economic loss on beneficiaries of the status quo.

Dairy farmers holding quota that allows them to profit from the supply restrictions imposed by marketing boards are in exactly the same position as the taxi drivers were. It’s hard to imagine how the boards’ stranglehold on the industry will be eliminated without compensation. But the fact the government may not be legally bound to pay compensation probably increases its leverage over them at least slightly.

Needless to say, the taxi drivers are considering an appeal to the Supreme Court, which is not always sensible. So we’ll see if our dairy policy does finally come down to Earth or if, despite the weight of logic, Canadian cows continue to jump over that object Jeremy Hansen and his American colleagues just visited.

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