Like real ones, the trade wars are being conducted on multiple levels.

There’s the phony war on Twitter. A more sophisticated contest takes place in hotel conference rooms, the fighting pits of diplomacy. However, the most brutal conflict takes place on the ground, where unwilling conscripts are required to rewrite business plans, abandon supply lines, find new customers, hire people to keep up with a spike in demand, fire people they’d rather keep, watch profits soar, despair as orders suddenly disappear — all because Donald Trump won more votes than Hillary Clinton, and because Canadians had begun to take preferential access to the world’s biggest economy for granted.

“I don’t like where the economy is at,” Robert Piccioni, founder and chief executive of Fuel Transport Inc., a Montreal-based logistics company, told me in an interview this week. “The instability of policy related to economics in the U.S. is not healthy for the world-wide economy.”

The Federal Reserve cut its benchmark interest rate by a quarter point, citing the trade wars as the primary reason. That caused foreign-exchange markets to gyrate. In the middle of all of this, Congress adjourned for its summer without ratifying the new North American free trade agreement. 

“These are tremors,” Cory Carson, president and founder of Border Bee, a customs brokerage said. “We are going to see constant upheaval in the future.”

What might such a future look like? A new analysis by Statistics Canada of our skirmish with the U.S. over Trump’s specious steel-and-aluminum duties may hold some clues.

Companies stockpiled like mad before Canada’s retaliatory duties went into effect on July 1, 2018. Steel imports from the U.S. were $604 million in June, 30% greater than the monthly average in 2017; imports of the miscellaneous consumer goods on the target list jumped to $824 million, a 19% increase from the previous year’s average; and aluminum rose about 13%.

At first, the surge in business confidence that followed Trump’s tax cuts in 2017 appeared to explain what was happening. But the positive vibe gave way to a sense of desperation, as executives recognized that Trump was serious about tariffs.

Piccioni’s costs rose because he had to pay higher wages to secure drivers, yet his own ability to charge more was constrained by competition from Inc., which was pushing hard to win market share in the logistics business. And then the orders dried up.

The average monthly value of steel imports between July 2018 and May 2019 was about $324 million, a 30% plunge from the 2017 average. The change in trade flows of the other goods was less violent. Imports of the miscellaneous items dropped 11% from their 2017 average, while the value of aluminum imports was about 4% lower.

Steel — which faced a border tax of 25% — was the only tariffed import whose trading patterns changed dramatically.

That raises some questions, including the effectiveness of Canada’s approach to retaliation. The list was carefully crafted to inflict pain in the districts of influential American legislators. It’s unclear that the 10% duty charged on the majority of the tariffed goods caused more than minor irritation for U.S. exporters. Carson observed very little substitution by Border Bee’s clients, mostly smaller companies that lack the means to seek out new suppliers. Some started showing a preference for “Made in China” over “Made in the USA,” although they continued to rely on the same U.S.-based suppliers. Most just paid the duties, assuming they could charge more. Sometimes that worked, but not always.

“It was totally new to them,” Carson said. “Tariffs are an incredibly blunt instrument. Half the time, you aren’t targeting the right people. You are punishing all kinds of people who have nothing to do with the trade war.”

The number of innocent victims may explain why outfits such as the Fed are starting to worry so much about the state of the economy. There’s something wrong, said Piccioni. Orders have rebounded from the post-tariff stall, but not fully.

“It’s like you are running a race and someone comes and chops at your right leg,” Piccioni said. “You fall and you eventually get through the pain. Once the pain is gone, you get back up and run, but you just aren’t running the same way you were before you got knocked down.”

Source: Financial Post