How significant is U.S.-Canada lumber dispute?

Fresh off slapping a duty on Canadian lumber, President Donald Trump is now making threats about dairy as the northern neighbour has suddenly, unexpectedly, become his main target for criticism lately on trade.

The president tweeted Tuesday: “Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!”

That’s what he wrote the morning after his government announced initial duties of up to 24% on Canadian lumber, with more expected later this year.

If you’re worried about how the move will impact Canada, you can rest easy, according to National Bank. In a research report, the bank says, “While the import duty of as much as 24% imposed by the U.S. will hit the forestry industry on the chin, the overall impact on Canada’s economy is likely to be limited. Note that Canada exported less than US$6 billion worth of lumber to the U.S. last year, accounting for just 1.2% of total exports.”

As a result, it adds, “even if lumber exports to the U.S. dives to zero ─ which has never occurred in the three decades of lumber-related trade disputes between the U.S. and Canada ─the net impact on Canada’s GDP would be less than half a percentage point.”

The provinces that stand to lose the most are B.C. and New Brunswick, says National Bank, “although it’s worth noting that forestry, logging and sawmill activity account for less than 2% of GDP in both provinces.” Plus, when it comes to the labour market, the bank says “there were less than 50,000 jobs left in forestry, logging and support activities, or less than 0.3% of total employment in Canada.”

The main reason to look at why Trump imposed the duty is to search for clues about his plans for NAFTA, as well as keep in mind the broader implications of trade changes between the U.S. and Canada.

Speaking in Kitchener, Ont. today, Prime Minister Justin Trudeau stressed that “we are tremendously interconnected in our economy with that of the United States, [and] it’s not just a one-way relationship.”

He added, “There are millions of good U.S. jobs that depend on smooth flow of goods, services and people back and forth across our border,” noting, “You cannot thicken this border without hurting people on both sides of it.”

Trudeau says “any two countries are going to have issues that will be irritants to the relationship, [but] having a good constructive working relationship allows us to work through those irritants. There’s always going to be political pressures to raise this issue or that issue […] but the core of this relationship is bigger than any two individuals sitting in the top of their respective governments.”

Read: Don’t expect NAFTA negotiations until summer, at earliest

Trade irritants and NAFTA

Lumber and dairy are longstanding irritants, and were also a problem file under previous presidents. In softwood lumber, the countries have a once-a-decade cycle of tariffs, trade litigation, and ultimately settlements.

What’s new is how Trump is playing up the issue.

While Barack Obama referred to lumber as a minor irritant, the self-styled America First president is playing up these irritants as examples of his desire to get tough on trade.

His sudden flurry of complaints about Canada are a dramatic departure from the early days of his presidency–suddenly, he’s complaining less about China and Mexico, and more about the northern neighbour.

In an exchange late Monday with conservative media gathered at the White House, the president said, according to Breitbart News: “We love Canada, wonderful people, wonderful country, but they have been very good about taking advantage of us through NAFTA.”

Then his commerce secretary went out of his way to link this dispute to broader complaints, about dairy and about NAFTA: “It has been a bad week for U.S.-Canada trade relations,” Wilbur Ross said. “This is not our idea of a properly functioning free trade agreement.”

The softwood spat is unfolding amid a much bigger trade issue: the renegotiation of the North American Free Trade Agreement.

It’s worth noting that, despite remarks from the president and his cabinet secretary, neither lumber nor dairy are actually part of the current NAFTA. However, different actors would be pleased to add provisions on one or the other.

CIBC’s Avery Shenfeld says in a research note that “it’s likely the reaction today is on fear that the lumber duties are the tip of the iceberg, showing that despite cosy talk between Trudeau and Trump, the U.S. is willing to flex its muscles to show a protectist”win”. […] [But] more telling will be how the broader NAFTA talks go.”