Canada could profit from US tariffs against China, but is now facing a trade showdown of its own

(Chip Somodevilla / Getty Images)
  • Analysis from Deutsche Bank shows Canada stands to benefit the most from the US-China trade war.
  • However, President Trump rejected an offer to meet with Canadian Prime Minister Justin Trudeau overnight.
  • At this stage, negotiations for a revised NAFTA deal appear to be failing.

  • Canada could benefit the most from the US-China trade war, but time is running out to make a deal with the Trump administration.

    With less than a week to go before the deadline arrives for a revised NAFTA trade agreement, tension between Canada and the US is rising.

    However, assuming a deal can be reached, analysis from Deutsche Bank’s Shreyas Gopal suggests Canada is best-placed to fill the void left by the US tariffs against China.

    To form his view, Gopal crunched a whopping set of numbers based on China’s 2017 US exports across 5,750 product lines.

    The thinking goes that as tariffs make Chinese products more expensive, US consumers will look elsewhere. And the country they’ll look to the most is Canada:

    Deutsche Bank

    Gopal based his analysis on two parameters — “weighted market power” and each country’s proportionate slice of the market share that China will lose.

    To reach his definition of market power, Gopal combined both demand and supply factors.

    Based on each country’s proportionate share of demand for products US consumers will no longer buy from China, then Canada, Mexico and the Eurozone have the most to gain.

    But on the supply side, Gopal also factored in the scope for “export shifting”. For example, Mexico and Canada already send 70% of their exports to the US, which leaves less scope for increasing market share.

    So on this measure, countries that have low levels of US exports for key Chinese product categories will have the most to gain by ramping up sales to US customers.

    As the chart shows, when taken in aggregate across the largest 850 items on the tariff list, South Korea emerges with the most market power.

    However, Gopal said Korea will be hampered by the fact it’s highly integrated with Chinese supply chains, with many Korean exports used as inputs for Chinese products.

    That leaves Canada and Mexico as the two countries best-placed to benefit.

    But while the Trump administration is on track to sign a bilateral trade deal with Mexico, President Trump rejected an offer overnight to meet with Canadian Prime Minister Justin Trudeau.

    He also threatened to hit Canada with a tariff on cars, while US Trade Representative Robert Lighthizer has said time is running out to reach an agreement.

    So while Canada is best placed to pick up the slack from falling Chinese exports, the US is currently poised to exclude its northern neighbour from a bilateral trade deal.

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