Should Canada answer Trump's tariffs? | The Professor Is In

Once someone has shown that they will never live up
to their side of an agreement, there's no reason for
anyone else ever to sign an agreement with it. And
that's essentially what the President's.
Done this week. President Trump imposed new tariffs on Canada.
You release an episode making the case that they are
actually more consequential than they may initially appear to be.
We're going to dig into some audience comments and questions.
I'm Megan Connors.
I'm Justin Wolfers, and this is the professor is in
think about this as office hours. Megan is bringing me
your questions. Let's get into it, Meghan.
Okay, So first up, I have to ask you the
timing all of all of this seems a little suspicious.
So in your professional opinion, do you think this has
anything to do with the Canadian wildfires.
I thought you were going to ask me for Adam
anything to do with the World Cup, because look, the
President's ego, bless him. We're all psychologically flawed, we all
deserve love despite our flaws. His are just a little
more naked and a little more obvious than the rest
of us. So the World Cup was an interesting one
where Prime Minister Karney was embraced by the players. They
thought he was cool, he was good to be around.
They quite explicitly turned their back on the President, and
in fact they had a FIFA had to usher him
off stage, explaining to him quietly that he was not,
in fact the star of the recent World Cup final,
and people were interested in the eleven men behind him.
That surprised the President, of course, And not much later
we got the Canadian tariffs. You have a different theory,
or you asked me about a different theory, which is
what about the Canadian wildfires? Let me deal people in
on that. On the previous Friday, the President tweeted, there's
so much smoke in America and there has been Megan,
You've had to stay inside in ann Arbor, Michigan. People
I've been coughing. They've had a really hard time. The
smoke's been hard. And what the President wanted to say
was I feel your pain where he look after you. Instead,
what he said was, damn you, Canada, this smoke comes
from your fires. We could come and help you a bit. Instead,
I'm going to swear at you, and he said he
would threaten tariffs. Was it twenty five percent on Canada
for having the temerity to have fires. My brother is
staying with me at the moment. My brother's from Canada,
it's from Toronto, and he made an observation that I
want to share with you. He said, Oh, it's Friday afternoon,
after market's closed, the President's going to say something crazy
on truth social My brother turned out to be right
yet again. My own view, for what it's worth is
people find it a little bit too much fun to
play the role of psychologist or psychiatrist and try to
understand the president's brain. I think understanding another person's brain,
their soul, their personality, and their characteristics is just profoundly difficult.
What I know how to do is to look at
the incentives that they have and the economies within which
they're embedded. The coincidence that you said is what you
get from looking inside his brain and his ego. Let
me give you a different view. We currently have ten
percent tariffs on every country around the world under a
temporary tariff that is only allowed to last for six months.
That six months ends on July twenty fourth, which means
the administration is going to announce its next round of tariffs.
This is what are called forced labor tariffs, which, by
the way, have nothing to do with forced labor. It's
just a new invented legal rationale. My guess is they're
going to come out maybe July twenty four and a half.
And so what the president's actually doing is you're saying, hey,
look there's another round of the trade war coming up.
I want to send a message before that. And the
message was what do you do when you want to
send a message, You find someone just small enough you
can beat them up a little bit without it doing
you too much pain. To my middle power Canadian friends,
I'm sorry that was you, and I do want to
reassure our friends north of the border. Those of US
south the border still love our Canadian friends, and I
think people on both sides of politics are a little
shocked at how we're trading our nearest neighbors.
Okay, so next up, we had a lot of people
in our comments, I think Canadians that were complaining about
kind of the dairy related tariffs in particular. Some people
claim that you misrepresented the issue. I was just wondering
if you could dig into that a bit more. What
issue is there between the US and Canada related to
our dairy trade and are the US's concerns ballad in
any way?
What a wonderful question, because the Canadians are going to
be mad at me, the Americans going to be bored.
Let me, first of all explain why boredom is the
right posture. Total dairy trade between the it's something like
a billion dollars here compared to like hundreds of billions
of dollars in the total thing in the in US
Canadian trade. There is this kind of tiny, tiny little
side show, and both sides should just shut up about it.
And if one side can't get the other side to
shut up about it, they should be quiet. It's you
don't want to knock anything off the rails for very,
very tiny fractions of the economy. Now I know, I've
just upset all Canadian dairy farmers because they don't think
they're a tiny fraction. They think they're totally essential, and
they think that they deserve all the government support that
they can get fair enough, But you're still small. But
I don't want to upset the world economy just because
of you. Okay, let me try and explain. It's so complicated.
I literally not only am I going to bore the Americans.
I am going to make a mistake with where I
put a semicolon, and the Canadians know a lot about
this and they're going to be mad at me for that.
So the Canadians have a very highly regulated dairy industry.
There's a lot of ways you could describe the reasons
for that. Canadians who fall in for all the political
logic trying to be a little provocative, there have a
very highly regulated market. Basically, the government says how much
can be produced and at what price, and then they
feel secure. Canadians like security. To my friends, I'm just
teasing that, and so they would rather not have any
of that upset by anything. Okay, the Americans come along
and they say we want market access. We want market
access originally part of NAFTA than USMCA, which our Canadian
friends called COSMA. It's an unused So Canada has a
protected dairy industry, very unusual form of protection. So we
all know what tariffs are. If you import something, you
have to pay a tax. We all know what a
quota is. A quota is you're only allowed to import
so much of something. The Canadian dairy industry uses what's
called a tariff rate quota. You can only import so
much American cheese, but you're allowed to break the quota.
But if you break the quote, you have to pay
really high fine that they call a tariff. Okay, let's
forget the fine part, because it makes for great politics.
The Americans talk a lot about it because if you
break the quota, then the tariff rate is like two
or three hundred percent. It's so high for a great SoundBite.
It's also so high it doesn't matter. It's effectively a quota.
No one ever pays it, Okay. So then effectively Canada
has quotas on dairy imports from the United States. Here's
the funny thing. Under the letter of the law, the
Canadians have given the Americans exactly the quantity of access
that they promised. They said, you will get a quota.
You've got it. Good on you. It turns out that
quote is not being used, that the Canadians are not
actually importing as much of the American cheese as they're
allowed to. The Americans are upset about that because under
the spirit of the law, you would have thought that,
you know, American cheese is good enough. It's not French
but our friends in Wisconsin grow make good cheese, and
so if Canadian consumers got their way, they would buy
a lot of American cheese. So here's the trick. Quotas
are so complicated. I hate them tariffs. You just pay
attack a quota. You say you're only allowed to import
this much. But then the problem is that makes sense
if you think you're just talking about two countries Canada
in the US, But actually trade doesn't occur between countries.
That occurs between companies. So which Americans are allowed to
sell to which Canadians? And how do you ensure that
some of the amount the Canadians import isn't created in
the quota. What you do is you say to a
bunch of Canadian firms, you're allowed to import this much,
and you're allowed to import that much and so on.
If you gave those quotas to retailers, say a supermarket,
they would import a lot of American cheese because it's
high quality, low cost, and Canadians wanted they didn't. Instead,
what they did is they gave it to the Canadian
cheese producers who make their own cheese. And so what
they don't want to do is they don't want to
import cheese that undercuts the cheese they're making. So the
Canadians technically did create the quota they were meant to,
which gives certain people the right to import American cheese,
but they gave it to the exact people who are
least likely to import American cheese. Maybe you could say
the Canadians better lawyers, or maybe say Canadians are being
a bit of a bar set about it. I want
to come back to something else. I want to say,
both sides grow up, don't destroy either economy over a
tiny industry that's already highly protected.
Okay, so what do we know thus far about how
Canada has been impacted by Trump's kind of wider trade
war in this second term.
Yeah, it's the Canada story is fascinating, I think poorly
understood south of the US Canadian border outside the American side.
Here's why. So, remember the first country President Trump went
after he was elected, The first tariffs he put on
with a so called fentanyl tariffs, where he went after
China or that wasn't very surprising, but then he went
after Canada and Mexico and imposed these big tariffs purportedly
because we were getting a lot of fentanyl from Canada,
which is also just flatly untrue. So Canada got the
biggest impact of the first round of the trade war,
and then came Liberation Day, and then came Unliberation Day,
and then came Liberation Day Part two, the sequel, and
then Liberation bites back, Liberation Day Part four, Summer Vacation,
and you know, we went through all of these things.
But somewhere along the way, the President got convinced that
he'd put tariffs on everyone around the world, but goods
that were compliant with the existing US Canada and US
Mexico free trade agreement would be exempt. By the way,
that wasn't true for other free trade agreements. Australia has
a free trade agreement with the US, Korea has a
free trade agreement with the US, but we still paid
these higher trunk tariffs like the Liberation Day tariffs. But
Canada had its free trade agreement recognized. Now you might say,
what does it mean to be a good that's compliant
with the USMCA. There's a bunch of rules in order
for your goods to be protected. Historically, a lot of
Canadian firms didn't bother getting their goods certified because tariffs
between the US, US and Canada were so low. What's
what's the done point? When the President jacks up tariffs
on everyone around the world, including Canada, rather than pay
the tariffs, all the Canadians went and said, oh, look,
our goods are compliant with the existing free trade agreement.
So suddenly ninety percent of trade between Canada and the US.
And by the way, there I've seen estimates between eighty percent,
ninety seven and a half percent. No one's quite sure,
but nearly all goods from Canada to the US were
usmc A complaint, which meant they no tariffs. What that
actually means is, as of a week ago, Canada had
the lowest tariffs from the US of any country in
the world because most of its goods had no tariffs,
and that wasn't true for other countries. Canada went from
getting hit the hardest to get and hit the least.
And then what happened last week, as the President said,
I'm going to apply these tariffs. These are new tariffs,
They're only on Canada and they apply irrespective of the USMCA.
The end of that carveout is really really dangerous for Canada.
It now means if the president's no longer recognizing the USMCA,
it now means whatever his next actions are, Canada could
get hit as hard as any other country. Three things
to take from this one. What a tumultuous ride. This
has been a soap opera of epic proportions telenovella. If
you will more for Canada than anyone else. They're closer
to us, they're more dependent on us, and they've had
more dramatic changes.
Two.
For much of this period, Canada in fact had lower
tariffs than everyone else, even as the headlines were the opposite.
Three that appears to be over.
Okay, So how do you think Canada should respond in
this moment?
Like?
What advice would you give them?
Yes, such a hard question. Let me go back to
a question of economic theory. This actually comes from an
old expression from Joan Robinson, the great Cambridge economist. She
once said, just because other countries put rocks in their harbor.
Let me explain the metaphor here. If a country were
rocks in their harbor, it would be harder for ships
abroad to come in. Tariffs are effectively a rock in
the harbor. They make it harder for imports to reach
a country. Countries choose to do that because countries seen
some countries in certain times are against inputs. So if
another country were to put rocks in its harbor, does
that mean it makes sense for you to put rocks
in your harbor? And the answer to that is, no
rocks in the harbor make it harder to do business.
And just because some other idiot is going to harm
themselves doesn't mean you have to match them them and
harm yourself as well. Now you might say, you wait
a minute, but if we put a tariff on Canada,
doesn't harm them No, And this is the really important point.
What economic theory tells is this when the United States
imposes tariffs on Canada. First of all, most of the
price rises affect Americans rather than Canadians. The President is
simply lying when he says Canada will pay for it. Secondly,
it harms Americans. It harms Americans because instead of getting
access to this wonderful chi technology for creating affordable goods,
which is buying them off a ship, we no longer
get access to that, and Americans end up worse off.
That's the amazing thing. Trade theory doesn't say, you want
to allow imports because it creates a market for our exports.
It actually says you want to allow imports because they
make Americans better off, irrespective of what's happening to exports. Again,
so economic theory says, if someone wants to put rocks
in their harbor, do the dumb thing hurt themselves, You
shouldn't do the same here. Now I have to recognize,
of course that's economic theory. We're in political reality land. Okay,
my job here, I'm an economics teacher. I'll teach the
econ You could now think of this as a strategic interaction.
And if every time the president punches we don't punch back,
then he's just going to keep punching you. So maybe
we should punch him, even if you're Canadian. Maybe Mark
Carney should punch back, even though it hurts Americans to
do so. Maybe let me come back to a different point.
If the claim is at the end of all of this,
the President's going to do this because he wants a
better deal, the most important thing for the Canadians to
understand now is there is literally no such thing as
a deal anymore. We have a deal. We had n't AFTA.
The President ripped it up and created USMCA. The President
ripped up the deal that the full before him created.
That full was him, and now he says, even though
it's passed through the US Congress, we are not going
to live up to it. In the President's actions both
in Iran and throughout various parts of the trade will
basically say the value of a piece of paper signed
by this president is zero. Therefore you should give up
zero to get it. So any trade deal it's of
the former Canada is going to take some pain now
and the US will make it up to us later.
It just simply shouldn't do it. Should only trade when
trading is in Canada's best interest. That would be the
advice I would give were I a Canadian.
Okay, So panning back now thinking about the US, what
are the long term implications. I know you've spoken on
this before, but what are the long term implications for
the US of this new style of three negotiation we're
engaging in.
I've been thinking a lot about this recently, and I'm
still trying to find the best way to articulate it.
But it's actually related exactly to what I just said.
Once someone has shown that they will never live up
to their side of an agreement. There's no reason for
anyone else ever to sign an agreement with it. And
that's essentially what the President's done. It's ironic because this
is the president who regards himself as a deal maker
and is always talking about deals and says he's using
all this leverage and power in order to get deals.
And he might get deals in the very narrow sense
of he could force a foreign leader to come to
the White House, say charming things about him at a
press conference, pretend that they write a deal, go out
the front and shake hands in front of an imported
car from some done country, make a bunch of claims,
and get a good media the next day. But a
real deal in terms of a lasting infrastructure that allows
tighter integration between two countries, long term investments where for instance, Megan,
you and I live very close to one of the
most important long term investments that came out of a
trade deal ever, which is that the North American auto
industry is totally integrated across the US Canadian border. That
your car doors might come from Canada and they come
down to meet us in Detroit, and then we might
send some parts up there, and the car that you're
driving right now, literally parts of it may have crossed
the border half a dozen times. And that's because they're
better at some things. We're better at others. But that
whole region now is a specialized car growing region and
one of the best in the world. And if we
put a wall between those two countries, neither region beer
is good and so but that required really deep, profound,
long run investments from both Canadian auto firms and American
auto firms, and I'm not sure they'd make those investments
anymore because if there's now the risk that we are
going to set up so that we can be the
preferred supply in Windsor Ontario, so we can be the
preferred supply to Detroit, Michigan, and a wall could come
up at any moment, then that investment's no longer a
good investment, and likewise elsewhere. So that long term integration,
I think, is really what's under threat. And so the
United States is going to become a lot more like
an island. I come from an island. Some islands are beautiful,
but I will tell you that being part of a
global economy gives you access to other goods, other skills,
other people, other ways of doing things, and it tends
to make an economy more competitive and to deliver more
innovative products at lower prices.
Okay, our last question. Given all of that, do you
think it's possible to rebuild trust on trade for a
post tromp America? And if so, what would it take
or what would be the first steps.
That's one of the most important questions for the next
four years. I think the president is a person. We
have a very personalist regime. The idea that the president
could rescue his reputation between now and twenty twenty eight
is absurd. Let's give up on the next four years.
The question is if the Trump era is behind us,
had we forever lost our reputation as reliable partners. I
think it's pretty clear that if the next president is
Don Junior, we have to put off that project for
another four years. If we were JD. Vance or some other
or Marco Rubio. While they may be Maga Republicans, they
may have a different approach to deal making, and so
that could be the beginning of it. So it doesn't
have to be a democratic administration. So a good democratic
administration or a Republican administration. It was interested in being
a reliable partner. This is going to be a really,
really important project. I think it's a hard question. So really,
what the United States is going to want is people
to say, hey, remember that once in a century, crazy
moment when we decided to no longer let up to
our obligations. That's what we want. The other possibilities. People
will always remember the American people twice elected a leader
who was isolationist, and they did it at very very
unexpected moments when people weren't really seeing as the writing
on the wall. And if it's happened before, maybe it
would happen again. I think the way forward, by the way,
is actually fairly obvious. A lot of what's going on
right now is because everything's coming out of the White House.
It's all executive order. Now. If you put stuff through Congress, realize,
of course that the single worst thing about Congress is
Congress never gets anything done. The single best thing about
Congress is Congress never gets anything done. Because if we
pass trade agreements through Congress, because Congress never gets anything done,
they can't walk away from them. And so I think
a lot of what's missing at the present moment is
that extra friction created by Congress. That friction here is useful.
That's Ulysses tying himself to the mast. That's the way
we show that we're in it for the long run.
And so I think if the next administration wants to
be taken seriously, it's going to have to figure out
a way to work with Congress to make that happen.
Okay, I think that's a great note to leave it on.
As always, thanks to our audience for your questions and comments.
We hope you enjoyed this episode. If you'd like your
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