Trump stands to win big on tax reform, but a trade war with Canada could change everything

Free market advocates can find plenty of encouragement in President Trump’s tax reform plan. The proposal contains a multitude of provisions that would spur economic growth, including dropping the corporate tax rate from 35 percent all the way down to 15 percent. However, the enthusiasm for his proposal is somewhat blunted by Trump’s earlier announcement of a tax hike on American consumers in the form of a big tariff on Canadian softwood lumber.

The 20 percent tariff could cost homebuyers billions of dollars. While these numbers are small relative to the potential economic stimulus that tax reform could deliver, the Trump administration must be careful to avoid further protectionist measures that could reduce or possibly zero out any economic gains achieved via tax policy.

Trump’s lumber tariffs represent another unfortunate chapter in a decades-long saga of protectionism and legal wrangling between the U.S. and Canada. The latest skirmish could prove to be a relatively small incident, but it has the potential to escalate and cause significant economic, as well as diplomatic, harm.

According to the Commerce Department, the United States imports about $5.6 billion worth of Canadian softwood annually. Much of this is used in home construction, where the cost of lumber accounts for about 17 percent of the construction cost of the average house, according to data from the National Association of Home Builders. The lumber tariffs will significantly raise the cost of new homes quickly and could hamper new development projects and construction, which would have an adverse effect on the job market.

{mosads}But the full impact could be much broader and more detrimental. For instance, how will increased lumber prices affect the massive infrastructure plan Trump will soon unveil? Will the tariffs — especially when combined with stricter Buy American measures — result in higher construction costs that reduce the number of projects? How will that affect the political dynamics of the infrastructure debate? Many members of Congress have already eagerly begun to eye important projects in their states and districts.

Beyond these unresolved issues, the Trump administration must be mindful of the important U.S.-Canadian relationship that is currently being tested.

Tensions were heightened recently when Canada unwisely acted to deter imports of U.S.-produced ultra-filtered milk — an ingredient used in cheese making. This move to further protect an already over-protected Canadian dairy industry was wrongheaded, but responding with massive tariffs on softwood lumber worsens the problem, and sets the stage for an economically ruinous trade war with one of our most important economic partners.

In 2015, the U.S. and Canada engaged in $663 billion worth of trade in goods and services, according to figures from the U.S. Trade Representative. Our northern neighbors were the largest market for U.S. goods, and Canada was the second-largest supplier of goods for the U.S. economy. These imports and exports directly support millions of American jobs and are essential to the economic well-being of both nations. 

With renegotiation of the North American Free Trade Agreement (NAFTA) on the horizon, a strained relationship between the United States and Canada becomes even more concerning. Done properly, a revised trade agreement could be a huge boon for both countries. For example, it could open up the Canadian dairy market for more competition and pave a new path forward for the technology and service sectors that have changed dramatically since NAFTA was first drafted. But if renegotiations are dominated by a protectionist, zero-sum approach to trade, the economic impact could be disastrous.

Free trade is an essential component of conservative, free market economics. The Trump administration is poised to make extraordinary improvements to the tax code that could facilitate tremendous economic growth and job creation. However, these gains could be blunted or even negated by new restrictions on international commerce. 

Resolving trade problems with Canada represents the first critical test of the new administration’s trade policy. Irrespective of the potential gains from Trump’s tax reform proposal, the potential harm to the economy caused by new tariffs and subsequent retaliatory actions by one of our closest and most important trading partners would be devastating.

Brandon Arnold is the executive vice president of the National Taxpayers Union and the National Taxpayers Union Foundation. He has testified on fiscal policy before Congress and numerous state legislative committees, and has appeared on several television and radio networks, including C-SPAN, Fox News, Fox Business, BNN, and Russia Today. His writings have appeared in publications including Politico, the American Spectator and the Seattle Times. Previously he was director of government affairs at the Cato Institute, and research analyst at the National Republican Senatorial Committee. Follow him on Twitter @BrandonNTU

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