American Trade Disaster
While it's not exactly getting major press attention, today marked the passing of the final hurdle preventing dozens of countries from starting a trade war with the United States. Canada's Trade Minister announced today that his nation was ready to start a trade war if the US does not repeal an illegal law. Canada has threatened to play counter tariffs on many American goods, including paper products, at 72% of the total tariffs imposed by the US. Canada is not alone in being given permission to retaliate. The European Union, Japan, India, Chile, Brazil and South Korea are all able to join Canada in placing tariffs on American goods at the same level. The implication for the American economy could be disastrous.
The American law in question is the Byrd Amendment, ruled illegal by the WTO, places tariffs on foreign goods and pays them to American firms. Essentially, it punishes foreign companies and gives that money to American companies. At the core of the dispute with Canada are illegal tariffs placed on Canadian lumber, clearly in violation of NAFTA. The Bush administration argued that low stumpage fees charged by the Canadian government to cut wood on crown land amount to a subsidy. Every trade organization in the world has disagreed with the US, but the tariff still remains in place and in the last two years Canadian lumber producers have been charged $3 billion. The US government intends to give that money to American lumber companies.
The US government is in an incredibly dangerous situation here. The trade deficit is already ballooning out of control and the Byrd Amendment has helped to keep it under control. If the government does not repeal the Byrd Amendment then dozens of countries around the world are going to put tariffs on American goods (indications are that the Canadian government, at least, is serious about tariffs – not so sure about other countries). That will cut down on American exports, on the other hand if they eliminate the Byrd Amendment then imports are likely to go up. Either way, it looks as though this will be another factor continuing the downward pressure on the greenback which will force interests rate up and inflation up. Essentially, a repeat of stagflation and certainty of economic collapse – as predicted by Stephen Roach of Morgan Stanley.
Links to Canadian stories on the issue (the American media seems to be ignoring it):
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