Jackie Crowe’s initial reaction to the White House’s latest round of tariffs was “absolute dread.”
Crowe is the owner of Luxury Hair Halifax, a small business in Nova Scotia’s capital that sells wigs, mainly to women undergoing cancer treatment.
Unfortunately for Crowe, wigs are among the more than $20 billion of Canadian goods targeted by new U.S. tariffs announced July 20.
Those 50-per-cent tariffs would be applied under Section 338 of the Smoot-Hawley Tariff Act of 1930, a law that had been collecting dust until the Trump administration invoked it last month.
While exports to the United States make up a small portion of Crowe’s business, she says the “domino effect” created by one-and-a-half years of relentless tariff noise has forced her to change her operations.
“We foresee [squeezed profits] as being an issue in the future if we continue to have [tariffs],” she said.
Crowe is hoping Ottawa finds a way to avert the tariffs.
However, some experts say Section 338 could be difficult to successfully challenge in court. And its vague language and broad executive powers make it a powerful tool for the Trump administration.
“This is not your run-of-the-mill law passed by the U.S. Congress,” said Ian Lee, an associate professor at Carleton University’s Sprott School of Business.
“[It has] never been used because it was always seen as the nuclear option.”
Stagnating talks
Lee says it was only a matter of time before the Trump administration imposed new tariffs on Canada.
In February, the United States Supreme Court struck down global tariffs imposed under the International Emergency Economic Powers Act early in President Trump’s second term. Trump vowed after the loss to find another way to impose tariffs.
The Canada-United States trade relationship has also been fractious.
From the U.S. perspective, Canada is the only country beside China that has retaliated against U.S. tariffs. And after declining to renew CUSMA for another 16-year term, the United States has moved ahead in bilateral talks with Mexico, while stalling negotiations with Canada.
The United States has cited Canada’s system of dairy supply management, provincial liquor bans and retaliatory auto tariffs as the reason for the new tariffs. American officials view these measures as Canada discriminating against American imports relative to imports from other countries.
“It seemed to me inevitable that they were going to do something about this frustration, that they don’t think Canada’s being cooperative,” said Lee.
Depression era law
Sources say Section 338 — which was enacted in the midst of the Great Depression — has always been seen as a tool to protect American businesses from foreign competition.
“This was the Depression and they wanted to be seen to be doing something to protect American workers,” said Lee.
Robert Glasgow, a trade lawyer and partner at KPMG Law, says Smoot-Hawley was drafted to target countries that offered more favourable trade terms to countries other than the United States.
Mona Paulsen, a professor of international law at the London School of Economics, says the law aimed to expedite decision-making by enabling then-president Herbert Hoover to “take the tariffs out of politics.”
“The president would sort of be above all the politics, because otherwise, tariff rate setting is a legislative process and often requires political discussion,” she said.
However, despite threatening to do so on several occasions, Hoover and his successors never actually used the law.
Paulsen notes that the scope of the law — which enables the executive to stipulate customs, regulations, tonnage and other components — makes it very broad, giving the Trump administration wide-ranging powers to act.
Will the tariffs stick?
There is no consensus on whether Section 338 could withstand a court challenge.
Unlike the International Emergency Economic Powers Act, which had been used by previous administrations, Section 338 is untested — which may explain why the Trump administration has waited until now to deploy it.
The law is difficult to interpret, says Paulsen, because it was enacted in a very different context than exists today.
“The United States is operating in a system where it has this incredible web of trade agreements, both multilateral [and] bilateral,” said Paulson.
“They’re pulling a law … that was designed outside entirely of this system.”
Glasgow says it is “highly questionable” whether Smoot-Hawley complies with either General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) obligations, which were founded upon non-discrimination principles.
Lee, on the other hand, believes Smoot-Hawley would be more likely to withstand a court challenge than the IEEPA because it directly addresses tariffs.
“The other acts [Trump] used were much more problematic,” he said. “This bill, because it’s very focused and precise … I think it’s less likely it will be struck down.”
What now?
At present the tariffs are slated to come into effect on Aug. 19.
Lee says Canada has had opportunities to find a deal that would satisfy the Americans but has chosen to stay put.
“You can’t say you can’t do an agreement with the Trump administration, because other countries have already done so.”
The European Union, Japan and South Korea have all struck deals with the United States. But Glasgow says those deals, which imposed about a 15 per cent tariff rate, are significantly higher than Canada’s current effective tariff rate with the United States.
“Any deal you get is going to look like that EU deal, which is worse than what we have right now,” he said.
Glasgow notes that the products excluded from the latest round of tariffs — primarily potash and energy — are Canada’s trump cards.
He points out that American farmers are heavily reliant on Canadian potash.
Refineries in the United States are also major importers of Canadian heavy crude oil.
“[The exclusion items are] telegraphing some of the key areas of weakness the U.S. has,” Glasgow said.
However, Prime Minister Mark Carney told reporters in Red Deer, Alta., last week that he “doesn’t see the value” of leveraging Canada’s energy industry in talks with the United States.
“Being a reliable supplier is important,” Carney said. “When you’re [the] supplier of [a] key service, you’ve got to think really hard about not supplying.”
On the other side of the country, Crowe, the wig seller, is hoping for a deal that will alleviate some of the disruption caused by the Trump administration’s tariffs.
“We were one small item on that huge list, and that huge list is very comprehensive.”
Professor Lee may want to reexamine his volatile statement about Canada’s unjustifiable intransigence in not making a trade deal with Trump simply because others have done so. Oversimplified statements, as he should well know, cast suspicions on the author and cause needless doubt in those whose topical knowledge isn’t fulsome.