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Liberals far from done spreading $1.3B in tariff revenue to steel, aluminum sectors

2019-08-05

The Liberal government's pledge to use all the revenue it collected from Canada's retaliatory tariffs on U.S. steel, aluminum and other products to support its domestic industries is driving a wave of spending announcements leading up to the fall election.

Have they spent it all yet? Not even close.

By the time Canada stopped collecting tariffs on May 20, the extra 10 or 25 per cent surtax tacked onto the price of certain American imports — from pipes to pickles — had added $1.33 billion to Canadian coffers.

Would this pad Finance Minister Bill Morneau's budget? No, Canadians were assured repeatedly. The revenue would "go back in support of the industry," his department said.

That's why for months, ministers and MPs have fanned out in their hard hats across Canada for a series of announcements big and small, doling out in dribs and drabs the proceeds of the tariff spat.

An analysis by CBC News shows there's more to spread around before this commitment is met. 

Redistributed, not refunded

It was an interesting pledge from the outset.

Canadian producers were harmed when the U.S. added a 10 percent tariff on aluminum and a 25 per cent tariff on steel in the summer of 2018. It made their exports less competitive in the American market (which was exactly the intention of the Trump administration).

But these steel and aluminum mills weren't the ones that forked over $1.33 billion to the Canadian government in retaliatory tariffs.

That tax burden fell on the purchasers of the U.S. imports: manufacturers who needed the U.S. products as inputs, construction companies who used the American components as building materials and Canadian consumers writ large, who had to suck up price increases on the long list of U.S. goods.

Smaller manufacturers and builders struggled. Some laid off employees, some gave up contracts and some saw key projects delayed by the unexpected higher costs.

On May 20, the Canada–U.S. tariff troubles abated, at least somewhat, for everyone.

Do steel and aluminum companies need or deserve more help now, financed by the tariffs everyone paid?

Opinions may vary. Recent earnings reports in the steel sector, for example, have shown stronger revenues, driven by high prices and strong demand. Protectionist measures in both Canada and the U.S. have disadvantaged offshore suppliers.

As bad times go, this past year has been relatively lucrative.

Remittances offset revenue

Some businesses made the case for exemptions from the retaliatory tariffs, based on certain criteria:

Contracts that pre-dated May 31, 2018 (when tariffs were announced).

A lack of Canadian suppliers for specific goods needed.

"Exceptionally challenging circumstances," as interpreted by the government.

If they met these criteria, businesses could apply for remissions up until May 20. The government has approved exemptions worth up to $445 million.

But that doesn't mean $445 million has been refunded. Importers have up to two years to claim their money back. To date, only $105 million has been claimed.

The Canadian Border Services Agency also has a customs duty deferral program that exempts importers from paying tariffs if, for example, products will be exported again. As of June 30, $37.5 million in surtaxes were waived under this program.

Assuming all these refunds are eventually paid, there's just under $850 million in net tariff revenue to distribute to steel and aluminum producers.

So, how is it distributed?

Strategic Innovation Fund: less than half spent

The assistance package announced a year ago for steel workers and businesses allocated $250 million over two years from the Strategic Innovation Fund, a program administered by Innovation, Science and Economic Development Canada. Companies apply for funding based on proposals to upgrade technology, add or train employees or make other investments to compete and expand.

Eligible companies must have at least 200 employees, but they do not need to be Canadian-owned (with profits accruing to Canadian owners or shareholders). Canada's major steel mills are all foreign-owned, for example. 

Six domestic steelmakers — Evraz, Algoma, ArcelorMittal, Gerdau Ameristeel, Nova Tubes and Tenaris Algoma Tubes — have received funding for projects ranging from $14 to $49.9 million. (By design, SIF contributions cannot exceed $50 million.)

These contributions were all "partially repayable," although the government doesn't reveal how much must be paid back. (Specific figures in companies' proposals are treated as commercially sensitive and not disclosed.)

Two aluminum producers — Alcoa and Alouette — have received support for smaller projects worth $10 and 15 million, respectively. These two announcements were non-repayable contributions.

Last November's Fall Economic Statement added to the pot of funds available under the Strategic Innovation Fund. In addition to the original $250 million, another $250 million was added "in light of revenues collected" from the retaliatory tariffs.

All tallied, these eight announcements are worth $194.9 million — less than 40 per cent of the available $500-million pot. 

The actual amount of tariff revenue that's been redistributed to the sector is less than that, considering an unspecified amount are loans to be paid back.

Funds for smaller companies also unspent

In March, Innovation Minister Navdeep Bains announced another $100-million fund for small- and medium-sized steel and aluminum manufacturers, to be distributed by Canada's regional development agencies.

Contributions can range from $150,000 to $1 million, and this funding is non-repayable.

Seven announcements have been made so far, worth $8.6 million in total payouts. That's less than 10 per cent of what's available. 

The bulk of the $2-billion assistance package offered to the industry a year ago is administered by Export Development Canada (up to $900 million in commercial financing and insurance over two years) and the Business Development Bank of Canada (up to $800 million in commercial financing over two years).

Only some of this help has been taken up: $205 million (23 per cent) of the EDC funding and $479.6 million (60 per cent) of the BDC funding.

Repayable financing from EDC or BDC doesn't represent a permanent distribution of tariff revenues — government loans must be paid back.

Support for workers

The government's support isn't limited to direct contributions like these.

Last summer, the government offered employers extended work-sharing agreements, which were designed to help steel and aluminum companies avoid laying off employees.

This support could have been worth up to $25 million, but it was taken up by only six employers, helping a total of 141 workers. (It's unknown how much each worker gets, but it appears unlikely this program is fully subscribed.)

The federal government also offered an extra $50 million over two years to the provinces, for more skills training and other employment assistance programs. Negotiations are still underway to sign agreements to get the second half of this money flowing.

Jobs for bureaucrats have also been financed by retaliatory tariff revenue.

Canada's response to the U.S. tariffs involved officials from at least five different departments and agencies. Finance Canada budgeted $66 million of the tariff revenue for policy development, administration and enforcement work.

In addition, Global Affairs Canada's Trade Commissioner Service is expanding its programs to support more export diversification for these and other sectors, thanks to $50 million in new funding over five years.

Source: CNBC