Trudeau Shows Once Again How “Beneficial” Trade Wars Can Be!

Larry Martin

September 3, 2024

On the very day that Google News released results of a poll reflecting that Justin Trudeau tops the list of
Canada’s worst Prime Ministers, he cemented that position with Canada’s agricultural sector by finding
out just how much fun you have when you start a trade war with a bully. Last week he announced (along
with the US and EU) punitive tariffs on imported EV’s, steel, and aluminum from China. He cited
“dumping” on China’s part as the justification.

So, today China announced an investigation of Canada for dumping canola. Canola represents about
25% of Canadian farmers’ gross receipts and China is the second largest customer, after the US. Not
surprisingly, the canola market was immediately hit hard: November futures that closed at $614.70 on
Friday, August 30, sunk to $569.90 shortly after China’s announcement (the market was closed for
Labour Day yesterday). Although there was some recovery afterward, the immediate reaction shows
how badly producers can be harmed by bad public policy. In the long term, who is going to gain from
this?

Unlike Canada, who is also a member of the World Trade Organization (WTO), China didn’t just
unilaterally impose a tariff. The WTO has a process for showing whether dumping has actually occurred,
which if proven, allows a country to impose a tariff legally. China, of course, is going to take Canada, the
US and EU to the WTO for their unilateral actions – more drama, disruption, uncertainty and, of course,
lots of legal fees for trade lawyers. On the canola case, China didn’t act unilaterally. Rather they are
following the rules and will launch an investigation through a WTO action.

This fact, plus a few others makes the day an interesting learning experience for people trying to use
futures and options to manage price risk. It illustrates the value of a simple rule – don’t panic! As the day
unfolded, canola futures gained back some of their early losses: November closed at $590.90. This
occurred for several reasons:

 

• The fact that China announced an investigation, not unilateral imposition of tariffs caused
  traders to have sober second thoughts – really, in the short term nothing changed in the market,
  though it will be interesting to see if China’s export orders fall in coming weeks.
• The regular US weekly report on grain exports showed that soybean exports for the past week
  were 18.4% higher than week earlier and 21.8% higher than the same week last year. Ironically,
  the largest recipient of those exports was China. This followed a report last Thursday that the US
  received over two million tonnes of weekly export orders for soybeans.
• Large speculators reduced their net short positions in soybeans by 6200 contracts – i.e.
  speculators who had already sold futures took this opportunity to buy them back because,
  interestingly, November soybean futures closed $.12 higher and were up as much as $.24. Some
  of the specs clearly changed their minds about which way prices are going to trend. Canola
  prices normally track soybeans fairly closely, after adjusting for the exchange rate. Between the
  higher soybean prices and a much lower Canadian dollar today, it will be interesting to see
  whether canola prices recover tomorrow.

Some people, including some brokers, panicked at the Chinese announcement and recommended that
people sell immediately. They may be right in the long term, but the day’s price action reminds one to
get all the relevant information before making a hasty decision. Even $21 per tonne, the difference
between the day’s low and close, is a very significant chunk of money on one of Canada’s major ag
products.