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Here we go again

Tariff disputes with the U.S. are nothing new

For many years we have complacently assumed that American displeasure with Canada’s supply management regime for dairy and poultry production was an issue well isolated from other agricultural sectors. This perhaps was never the case, but it certainly is no longer. If the wayward and quixotic President Trump can slap punitive duties on steel and aluminum, what is safe?

History tends to repeat itself and the latest tantrums from the Oval Office are reminiscent of the Fordney-McCumber and Smoot Hawley tariffs of 1922 and 1931 that drove a path of destruction through the Canadian cattle industry. It is now almost forgotten but the Canadian Cattlemen’s Association was created in 1932, then known as the Council of Canadian Beef Producers, largely in response to the devastation caused by these tariffs. So, a little history is appropriate.

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In 1913 the U.S. duty on cattle of all weights was “Free.” In 1922 tariffs were raised under the Republican Fordney-McCumber Tariff Act from “Free” to $1.50 per cwt live weight. This may seem a modest tariff until one realizes that cattle price in 1921 was about $13 per cwt and the tariff knocked them back to about $7 per cwt in Ontario (see chart below), and lower in the west. This amounted to a tariff of roughly 20 per cent of the value of the animal, when converted to an “ad valorem” basis. This was a larger price setback than expected but the sharp price drop reflected the heavy dependency on the U.S. market, and with U.S. buyers no longer bidding, the price fell to the level that reflected only domestic demand.

Then in 1930, with cattle prices already in retreat, the Smoot-Hawley Tariff Act, also imposed by a Republican administration, raised the tariff on cattle weighing under 700 lbs. from $1.50 to $2.50 per cwt and doubled the tariff on cattle weighing over 700 pounds to $3 per cwt. In 1933 cattle prices in Ontario bottomed out at $4.63 per cwt and in that year the tariff, when converted to an ad valorem basis, added 64 per cent to the export cost of the animal.

So, we’ve seen this kind of protectionism before and, irritated as President Trump clearly is by the dairy and poultry supply management regimes and “egged” on by R-Calf, with its continuing demands for the restoration of country-of-origin labelling, there can be no assurance that the cattle and pork industries might not get caught up in this vortex of madness. In fact, it has already begun with a retaliatory 10 per cent duty on some “prepared beef meals” from the U.S. Do we imagine that this won’t escalate? It seems to me that retaliation in a sector completely distinct from the first measures started by Trump is one sure way to ensure continued escalation of this trade dispute.

An enormous amount of work, and not a little bit of necessary compromise, has gone into stabilizing the world trade order in what is now known as the World Trade Organization (WTO). NAFTA has, up until now, been a shining example of what is possible. It is, and should be broadly recognized that long-term and stable trade agreements are necessary to give businesses, including agricultural businesses, the confidence they need to invest and prosper. National governments obviously have the job of negotiating these agreements but equally, the responsibility of honouring those agreements in a manner that is not unnecessarily disruptive to long-term business commitments. Inevitably, there is a need to renegotiate aspects of any agreement but these renegotiations should be both deliberate and respectful of the parties’ interests and not driven by the volcanic eruptions of a tempestuous president.

The chart shows what happens when short-sighted political interests tamper with legitimate international trade agreements.

If cooler heads prevail, a faint hope, we might still negotiate our way out of this mess. One thing that should be apparent to the Americans is that they could not possibly maintain their very healthy export thrust in beef without the imported supply from Canada. Canadian exports of beef and live slaughter and feeder cattle, when converted to carcass weights, have been equivalent to one-third of total U.S. exports. So, if domestic consumption in the U.S. had remained unchanged, U.S. beef exports would have been reduced by over 30 per cent.

Retaliation may be the only response we have but it is a crude weapon that often inflicts its damage indiscriminately on all parties on both sides of the border. So, while there is no immediately apparent alternative to retaliation, industry leaders and thoughtful politicians should be considering other options, the first of which should be to build into trade agreements protection against abrupt and capricious interventions for temporal political gain. National governments that do the marvellous and essential work of creating long-term trade agreements should respect, defend and preserve their handiwork.

At the producer level, one begins to understand the fragility of these agreements when they fall into irresponsible hands. In the Canadian cattle industry this year, assuming there is no further retaliation, approximately 50 per cent of the entire output of the industry will find its way into the U.S. market either as feeder cattle, slaughter cattle or beef. That’s more than the 42 per cent that will be consumed in Canada. This creates a huge amount of uncertainty and risk and maybe explains the hesitancy across the land to start any expansion in the national cow herd. Because of its long-term time horizons, five years from a decision to expand until increased production reaches the market, is sufficient reason for caution. It is also sufficient incentive to work harder to diversify the export market.

Charlie Gracey is an independent analyst of the beef industry living in southern Ontario.

About the author

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Charlie Gracey is a beef industry analyst living in Ontario. More detail on this topic is available on his website at www.charlesgracey.net.

Comments

  • Hubert McClelland

    A very good historical perspective that our farm exports to the USA are drastically threatened going back over 100 years. It calls for very cool thought on our behalf,

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