Trump tariffs revive lessons from the Smoot-Hawley era

WELLINGTON COUNTY – For Wellington County’s farmers and agri-food producers, the eventual consequences of the ongoing trade dispute between Canada and the U.S. remain uncertain.

Since Trump took office for the second time last January, the United States has pursued an agenda of tariffs that has rattled relations between the two nations.

When Trump first came to office, he introduced a tariff of 25 per cent on Canadian goods, as part of an alleged effort to get tough on fentanyl entering the United States through the northern border.

(According to the Canadian government and other sources, about 96% of illegal fentanyl entering the U.S. is seized at the Mexican border – and less than 1% comes from Canada).

The U.S. and Canadian governments engaged in tit-for-tat retaliatory measures, before the spat dissipated into sector-by-sector negotiations.

One of those sectors is particularly important to Wellington County: dairy.

Virtually all Canadian dairy farmers operate within the system of supply management, wherein output is tied to quotas set up by the Canadian Dairy Commission and its provincial counterparts to enable production that roughly meets Canadian consumer demand.

The point at issue from the American side is that supply management creates a protected market where U.S. dairy exports have limited ability to compete. 

Some U.S. dairy products enter Canada tariff-free, but imports above specified thresholds can face tariffs of 200% or more. 

Yet Canadian government officials say U.S. dairy imports have never surpassed the threshold and have therefore never been subjected to the tariffs.

Over production

Jamey Essex, a University of Windsor professor and expert in the political economy of agriculture and food, says American dairy producers have a longstanding problem with overproduction, and the U.S. wants Canada’s supply management system relaxed to allow more American dairy into the country tariff-free.

But for the Canadian government, doing so presents a political liability. 

Dairy producers are an important agricultural constituency, particularly in Ontario and Quebec, and farmers have expressed concerns that relaxing Canada’s protections could undo decades of investment in the domestic industry.

The issue also extends beyond milk. Dairy trade encompasses cheese, butter, whey protein, infant formula and ingredients that end up in numerous other consumer goods.

Smoot-Hawley bill

This is not the first time Canadians have had to deal with a protectionist United States. 

Trump is invoking the Smoot-Hawley Tariff Act, a sweeping protectionist bill that passed in 1930, as a legal basis for imposing tariffs on Canada.

The bill initially emerged as a response to aggrieved farmers in the U.S., with American agriculture marked by increased farm foreclosures over the 1920s. 

The bill, signed into law by Herbert Hoover, discriminated against Canadian products and influenced the 1930 Canadian federal election. 

With the sitting Liberals  led by Mackenzie King perceived as more tied to the U.S., the Tories led by R.B. Bennett sought to emphasize trade ties to Great Britain and prevailed in the election.

Boycotts

Ontario is among several provinces to respond to the current trade dispute by removing American liquor from LCBO shelves. 

Consumer boycotts played a role in an earlier period of U.S.-Canada trade tensions. 

According to economic historian Doug Irwin in Peddling Protectionism, U.S. exports to Canada fell by 21% in 1930.

Canadians particularly targeted American eggs in retaliation for U.S. protectionist measures.

In his memoirs, Cordell Hull, who served as secretary of state under Franklin Delano Roosevelt, recorded that American egg exports to Canada fell from 919,543 dozen in 1929 to 13,662 dozen in 1932.

American agricultural exports faced discrimination abroad, while farms continued to foreclose as the Great Depression deepened.

Dairy dispute

“What we are seeing now in the fight over U.S. dairy exports to Canada is something that has happened many times in the past,” Essex told the Advertiser. 

“Food supply is an easy place to hit your opponent in a trade dispute because it might make them blink first and provides opportunities for trade-offs.”

For Wellington County’s dairy farmers, the more immediate concern is what happens if concessions enable the Canadian dairy market to be poached more by foreign competitors.

Janet Harrop, a dairy farmer north of Fergus and past president of the Wellington Federation of Agriculture, says she is relatively confident that supply management will remain intact.

However, Harrop is concerned about concessions involving tariff-rate quotas, which allow specified quantities of U.S. dairy products to enter Canada at low or negligible tariffs.

The U.S. gained greater access to the Canadian dairy market through these quotas during negotiations for the 2018 Canada–United States–Mexico Agreement and has challenged how Canada administers them. 

Harrop worries further concessions could allow more “finished product from the U.S. into Canada,” displacing Canadian milk and dairy products.

Skepticism of free trade and arguments that the U.S. is being “ripped off” by allies have been themes of Trump’s public commentary since the 1980s. Essex sees the current strategy as an attempt to use immediate economic pressure to produce more lasting changes.

“The only consistent thing has been the desire to exert economic power and use tariffs as a short-term bludgeon to get a long-term structural change,” he said.

Nearly a century separates the current dispute from Smoot-Hawley, and the economic circumstances are substantially different. 

But the earlier trade fight demonstrates how measures designed to protect domestic producers can invite retaliation and produce consequences beyond those originally intended.