Trump's trade war with Canada and the impact on grocery

We are now at war with the United States--
a trade war that is. In response to U.S.-imposed tariffs on steel and aluminum, Canada will implement retaliatory tariffs on U.S. imports, effective July 1. It’s like Walmart going up against that cute little gift store we visit every so often. And to be clear, Canada is not Walmart in this scenario.

The war appears to be moving into agri-food, one of the most sensitive economic sectors when it comes to trade. In fact, in its recently-issued notice of intent, the government has flagged 23 food products originating from the U.S. that will be subject to a 10% surtax or similar trade-restrictive measures.

History has shown that trade wars are not kind to consumers when agriculture and food products are targeted. Food inflation tends to skyrocket when barriers are erected. We import more than $25 billion worth of agri-food products from the U.S., and fruits, nuts, vegetables, beverages and baked goods represent a big portion of what we buy. Interestingly, none of those items are subject to Canada's impending surcharges. In other words, it's highly unlikely these counter-measures will become a threat to Canada’s food security–something trade wars tend to do.

Actually, categories with lower sales volume are being targeted and most of the food products listed on the notice of intent--including yogurt, ketchup, maple syrup and jam--have Canadian-made alternatives. Other categories such as prepared foods, mustard, soy sauce or mayonnaise may be more problematic. As such, Canadians will likely see some American goods becoming more expensive, or perhaps some will be as expensive as many Canadian-produced products. This could be welcome news for some of our businesses, and the “Buy Canadian” movement will certainly see this as a needed boost. The challenge is that many of the U.S. products are much cheaper, even when our dollar was worth below 75 cents against the U.S. greenback. Price points will likely go up and cheaper options could be limited.

But food retail prices have barely moved since January. Food inflation is at 0.1%. Prices have room to increase, allowing grocers to breathe and increase margins. If tariffs are implemented, grocers could see this as an opportunity to raise prices, regardless. If they opt to do this, it will be brilliantly subtle and consumers may not even notice the 3% to 4% hike on prices of American-based food products.

The notice of intent targets consumable food products many Canadians buy regularly but not frequently. In fact, the list seems to include either products we manufacture, or products we should be manufacturing more of such as soy sauce and mustard. In the case of mustard, few Canadians are aware that Canada is the largest exporter of mustard seed in the world. Most of it is sold to the U.S., and we buy it back in bottles at twenty times the price. This could perhaps be the excuse we’ve been looking for in order to change this practice, but it is still too early to tell. So, in a sense, the list was cleverly put together.

Ottawa has decided to retaliate by using an age-old scheme in trade wars: tariff barriers on food. Throughout history, countries protecting their market by issuing duties on food imports have seen how measures can be dangerously short-sighted and can often backfire. Ottawa appears to be playing a different game. It seems to want to send a clear message to Washington, while at the same time offering the food industry an opportunity to grow. In a sense, its notice of intent delicately strikes a balance between diplomatic resilience and economic inducement for our agri-food economy. Consequently, it may not be such a bad thing if mustard and mayonnaise get more expensive.

But based on pure economics, Canada cannot win against the United States. The “we’ll show them” attitude can only go so far and some argue the Trudeau government is playing a game of chess with Washington. Objectively, the game looks more like Russian roulette than anything else. Many things could happen before July 1, though. We should all hope Canada has a long-term plan if this trade war lasts a while, as it likely will.