April 25, 2017 / 9:07 PM / 6 months ago

Canada's options limited as it faces prospect of U.S. trade war

A worker checks a truck with a load of logs at Sqomish Forestry LP in Squamish, British Columbia, Canada April 25, 2017. REUTERS/Ben Nelms

OTTAWA/WINNIPEG (Reuters) - From cherries to wine and oil, Canada has a range of tools to retaliate against any Trump administration trade attacks but they are either too limited or too painful to invoke.

Ottawa is keen to avoid a costly trade war with the United States as NAFTA renegotiations loom, given the U.S. economy is ten times larger than Canada‘s.

Cutting off energy exports is an option so fraught with risks - Canada is the largest supplier of energy to the United States - that Ottawa has never discussed it seriously. Meanwhile, hitting back on U.S. imports of goods like cherries and office chairs may have too little impact, leaving Canada with limited leverage.

U.S. President Donald Trump’s administration has suddenly ramped up its attacks on Canada, imposing tariffs on softwood lumber and vowing to take action against what it calls unfair practices by Canadian dairy farmers.

Trump last week also said Canadian energy was another example of a bad trade deal for the United States, but gave no specifics or evidence.

Canadian officials played down the tariffs as disappointing, just one part of an otherwise successful trade relationship, even though Canadian government ministers have fanned across the United States selling the virtues of bilateral trade.

“There are no victors in a trade war,” Scott Brison, a senior Canadian cabinet member, said by phone from Detroit.

A senior Canadian political source said Ottawa would not for now be changing its approach despite Trump’s harsher tone.

“This is a classic pre-negotiating tactic. It’s in his book,” said the source, who requested anonymity because of the sensitivity of the situation.

Both softwood lumber and Canada’s system of protections for its dairy industry were kept out of the initial North American Free Trade Agreement in 1994, making it easier for the United States to raise them now without having to wait for formal negotiations.

Top officials, noting that international trade authorities have always ruled in Canada’s favor in the long dispute over softwood lumber, say Ottawa will fight back against the tariffs and win again.

Ottawa will consider all options, including a World Trade Organization or NAFTA challenge, and help companies and workers who lose their jobs because of the U.S. move.

In a sign of where the United States might strike next, international trade lawyer Mark Warner said Washington had asked to be granted observer status in a case Brazil opened in February against Canada at the WTO, over allegations of unfair subsidies to planemaker Bombardier Inc.

“I have noticed more and more people mentioning that in the United States and people don’t tend to mention things randomly,” Warner said by phone.

Any U.S. action on planes would, like dairy and lumber, take place outside the process of NAFTA, which also includes Mexico.

‘GET THEM WHERE THEY EAT’

The process of bringing disputes to NAFTA or the World Trade Organization can take years, and Washington tends to challenge the rulings, dragging out the pain for domestic producers hit by tariffs.

An even bigger risk for Canada is a border tax against Canadian products, a development that would prompt Canada to “consider certain measures,” according to Transport Minister Marc Garneau, chair of a powerful cabinet committee on Canada-U.S. relations.

A draft cabinet memo, first reported by a Canadian newspaper last month, said that if the U.S. introduced protectionist measures, Canada would consider retaliation against “certain goods used in certain infrastructure projects”.

The last time Canada prepared for a trade war with the United States in 2013, over contentious meat labeling rules, it targeted dozens of seemingly random American exports, from cherries and chocolate, to wine and office chairs.

The goods had been chosen carefully to hit where key legislators live, rather than inflicting broader economic pain. U.S. industry groups and voters pressed elected officials to avoid retaliation that would have especially hurt their own districts.

The tactic worked, according to the politicians who devised the plan, and insiders say Canada might use the same play book again if Trump decides on protectionist measures.

Officials declined to say how and where Ottawa might act. But a Canadian government fact sheet listing major U.S. exports to Canada by state offers some clues.

Potential targets for Canadian sanctions would include plastics from Kentucky, home state to Senate majority leader Mitch McConnell, or paper board from Wisconsin, where House of Representatives speaker Paul Ryan is based.

“You get them where they eat ... You can’t just roll over and say, ‘We’ll wait to see what they demand,'” said Gerry Ritz, who was farm minister in the Conservative government that drew up the sanctions in 2013.

Writing by David Ljunggren; editing by Grant McCool

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