Or, when 10% is not just 10%. (GM edition)
This is a reprint of a 2018 post. It takes on a heightened importance when one considers (1) the fact that tariffs on Canadian imports will hit a lot of inputs, rather than final goods, and (2) the integrated nature of the American auto industry.
An effective rate of protection (ERP) calculation takes into account the fact that domestic value added might be less than total value added – i.e., there is substantial imported value added in the final good. Suppose a 10% tariff is applied to motorcycles, so that a totally US made motorcycle which originally sold for $25000 (under free trade) can now sell for $27500 because of the protection from foreign imports. In this calculation, effective protection equals nominal, i.e., 10%. However, suppose imported inputs used in motorcycles were $15000. Then the effective rate of protection is 25% (=((27500-15000)/10000))-1).
Perhaps even more important, suppose instead a 10% tariff is applied to the imported inputs into motorcycle. Then the effective rate of protection is -15% (=((25000-16500)/10000)-1). To redress this negative rate of protection, the protection on inputs would have to be coupled with a 6% nominal tariff on motorcycles. The more pervasive vertical specialization (i.e., more specifically, the greater the share of imported components), the more prominent this problem.
And that’s a final good tariff just to even out things domestically. If you want to export the motorcycles, well, you’ll need an export subsidy. Under current WTO agreements, those are generally illegal.
Some things to consider as we go down the path of protection — and protection that is unlikely to reduce the trade deficit [1]
For a discussion on ERP from an expert, see Doug Irwin on pages 156-157 of International Economics (Cambridge University Press, 2025) .
WT who? If the Constitutional provision of birthright citizenship isn’t respected, why should a rule sponsored by the U.S., maintained by an organization created by the U.S., in service of “western values” as seen by the U.S., matter to the felon-in-chief?
A bit of U.S./Canada trade detail from Scotia Bank:
https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.canada-and-us-economics-.canada-and-us-decks.trade-stats–january-31–2025-.html#:~:text=Overall%2C%20Canada's%20exports%20are%20highly,(Jan%E2%80%93Nov.).
A few highlights:
“Canada imports roughly 34% of its inputs (i.e. intermediate goods) from the US, but exports roughly 75% of total inputs it produces to the US.”
“Overall, Canada’s exports are highly concentrated to the US. All goods exporting sectors, save agriculture and metals and minerals, rely on US goods markets for between 74% – 100% of overall exports.”
These figures show Canada’s vulnerability to U.S. tariffs. If there’s to be an actual trade fight, Canada needs to be willing to go big, and so to suffer big damage, in order to even the fight.
“Canada accounts for 51% of total US imports of energy, 38% of forestry and wood products, and 17% of metals and minerals.”
Canada’s energy exports could be a potent source of leverage. As has been noted in comments here, Canadian oil exports to the U.S. are geographically concentrated. States adjacent to the Great Lakes could be badly hurt by a Canadian oil export ban. We gringos tend not to know as much about our trade partners, so our new political leaders may be unaware of long-standing assumptions about “continental energy security”. Canadians are not so ignorant. There may some bluster (do Canadians bluster?) about using oil as a retaliatory weapon, but it would probably be a last resort. Our felon-in-chief has no regard for existing arrangements, but wiser heads do have, because they think of long-term consequences.
Perhaps regional concentration of trade could sharpen some other forms of retaliation.
“The states that export most to Canada as a share of overall goods exports include North Dakota (70%), South Dakota (45%) and Maine (42%).
“The states that rely most on Canada for goods imports as a share of overall imports include Montana (92%), Maine (71%), and North Dakota (65%).”
North Dakota, Maine and Montana could be made to suffer mightily. However, other than their generous helping of senators, those three states don’t have much clout. Hammering them would have to be part of a larger strategy.
The same Scotia Bank article has some background on U.S./Mexico trade:
https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.canada-and-us-economics-.canada-and-us-decks.trade-stats–january-31–2025-.html#:~:text=Overall%2C%20Canada's%20exports%20are%20highly,(Jan%E2%80%93Nov.).
Some highlights:
“Machinery and equipment manufacturing (which includes automotive/parts) ($193 bn USD) and electronics manufacturing ($119 bn USD) account for 66% of US goods imports from Mexico. These two sectors also account for 66% of goods exports to Mexico ($67 bn and $65 bn USD respectively).”
This looks like massive integration in the machinery and electronics manufacturing sectors – pretty much what one would expect, and a good reason NOT to impose tariffs.
“Texas accounts for 40% of overall goods exports to Mexico, and 30% of overall goods imports.”
Along with simple geography, these relatively high shares also point to cross-border integration. If Mexico were to team up with Canada, Texas could be added to targets for especially bad treatment. Texas has clout. Michigan, by the way, is the second biggest recipient of imports from Mexico, probably reflecting intermediate goods in the auto sector. Messing with auto parts trade might be as sensitive for Mexico as oil trade would be for Canada, so might be a last resort.
Certainly, Mexico and Canada will strategies together, and just as certainly, the rapist-in-chief’s minions will try to drive wedges between them.