ON DECK FOR MONDAY, FEBRUARY 10
KEY POINTS:
- Markets largely shake off Trump’s latest trade tantrums
- Trump to deliver executive order on steel and aluminum tariffs today
- Canada is the biggest exporter of steel and aluminum to the US
- Expect high pass through of tariffs into steel and aluminum prices
- Multiple studies showed that the US hurt itself with the 2018 steel & aluminum tariffs
- Canada would not be better off as part of the US
- Global Week Ahead — The Super Bowl of Budgets (here)
So far, markets are taking another belligerent move by Trump relatively well. Sovereign yields are little changed but with a roughly 5bps decline in Canadian yields from 2s through 10s outperforming other global benchmarks. Equities are broadly higher by roughly ¼% to ½% across exchanges. The dollar is mixed but both CAD and MXN are slightly depreciating with CAD the weakest performer among major crosses largely because it is the biggest exporter of the targeted metals to the US. There is nothing else material by way of developments across global markets to start the week.
Steel and Aluminum Tariffs Coming Today
Trump said yesterday that he would announce 25% tariffs on all imports of steel and aluminum today. Watch for an executive order to be issued at around 1pmET. Then watch for the retaliation announcements as in 2018.
Canada is the number 1 source of US steel imports but only barely above the EU taken as a whole (chart 1). Canada is by far the number 1 source of US aluminum imports (chart 2).
Canadian exports of steel and aluminum to the USD equalled 5.8% of all Canadian exports to the US including 1.8% in iron and steel, 1.4% in articles of iron and steel, and 2.7% of alumina and aluminum products.
Canadian imports of US iron and steel and aluminum equal about 4.6% of all imports from the US broken down as 1.56% iron and steel, 1.95% articles of iron and steel, and 1.09% alumina and aluminum processing.
Chart 3 shows the trend in Canadian exports to the US of steel and aluminum as a share of total Canadian exports. Chart 4 shows the same thing for the US to Canada. Chart 5 shows Canadian imports of these products from the US and chart 6 does likewise for the US.
Naturally, these figures understate the extent to which steel and aluminum are used in many products. The pass through incidence effects of tariffs are likely to work through every product from autos to appliances as just two examples. For example, the US producer price index for iron and steel surged by about 17% after the 2018 25% tariffs, though that was child’s play compared to the supply chain disruptions in the pandemic (chart 7).
Trump also pledged to announce reciprocal tariffs on any country that imposes tariffs on the US and to do so in separate orders over the next couple of days or so. The US already has an average tariff rate of 3.5% on all imports including 4.8% on agricultural imports and 3.2% on non-agricultural imports so once again we have a case of do-as-I-say-not-as-I-do when it comes to American trade policy (here). Canada’s is higher (here). America, however, also uses other tactics beyond tariffs, like constant trade harassment and refusal to abide by agreements and rulings on commodities like Canadian lumber exports where it steadily loses arbitration panel decisions. The US employs heavy use of subsidies across multiple industries such that its protections extend far beyond tariffs. And the US frequently does not honour its own agreements as we’ve seen in the steel and aluminum tariffs of 2018, NAFTA tensions, the latest round of metals tariffs and Trump’s constant threats to impose draconian tariffs that far swap any average tariff rates imposed by others.
This is a decent summary of the economic impact of the US Section 232 steel and aluminum tariffs in 2018. It reviews several studies that looked at the impact on GDP, jobs, exports etc.
How Canada Compares to the US
So Canada would fare better as the 51st state? Trump says so and he never bends the truth, right? Hmph. Let’s remind him of some facts on how America compares to Canada. There is much, much more to comparisons that average incomes.
1. There is little question that US incomes on average are higher than Canada’s and that Canada’s GDP per capita has been falling at least temporarily, although reducing the population of temporary residents is likely to improve this measure. But much of that comparison reflects a skewness toward the very well off. Canada ranks only slightly behind the US on median household incomes. And there is more to the picture than incomes. Much more.
2. World Bank Human Capital Index: Canada ranks above the United States in every single category including overall human capital index, the index for men and the index for women, expected years of school, harmonized test scores, years of school and survival rates. Get the data here.
3. Canada ranks above the US on the UN’s Human Development Index. Go here.
4. The Economist’s Global Liveability Index includes two Canadian cities (Calgary, Vancouver) in the top 10 worldwide and no US cities. Toronto is 12th. The highest-ranked US city in the world is Honolulu—at #23. Sorry New York, you’re only 70th. Here. The Economist says “Canada’s strengths are its public services, particularly its health-care and education systems, which consistently earn top scores. The country is also more stable politically and has less violence than does its southern neighbour.”
5. Canada ranks higher than the US on the UN’s Universal Health Coverage Service Coverage Index that measures access to health care (here). Around 26 million Americans have no health coverage (here). Don’t get sick in the US if you have no insurance or little insurance which is a whole other category; at a minimum it can be financially ruinous if you are at all able to get treatment.
6. Canada ranks higher than the US on harmonized test scores (here and here).
7. On income inequality there is no comparison. Canada’s Gini coefficient is much lower than the US (here).
8. The US murder rate is nearly triple that of Canada’s (here). Canada’s homicide rate per 100,000 people is 2.27. The US sits at 6.38. Gun ownership in the US is vastly higher than in Canada and other developed economies.
9. Canada ranks far safer than the US on overall crime rates. These folks rank Canada as a category 3 country on a 1–11 scale and rank the US at 7 on the same scale.
10. US fiscal policy is mismanaged by a massively wide margin to Canada. The US Federal government’s deficit to GDP ratio is over 7%. Canada’s is just over 1%.
11. Canada has longer life expectancy than the US by several years on average according to both the UN and World Bank measures (here).
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