The re-election of Donald Trump has prompted an apparent shift in Canadian foreign policy: from the finger-wagging, values-based approach so familiar over the past nine years, to a new brass-knuckles realism that puts the national interest ahead of all other considerations.
How else to explain Chrystia Freeland giving one of our largest trading partners the equivalent of a sharp kick in the guts?
The deputy prime minister said this week that Canada will not be a back door to North America for Chinese goods.
“The same cannot be said of Mexico,” she said, adding that the concerns of Trump supporters about unfairly traded Chinese goods are “legitimate” and that Canada, as a partner in the USMCA trade agreement “shares those concerns.”
It is a marked shift from Trump’s first term in office, when Canada and Mexico presented a united front to the Americans — right up until the moment the Mexicans negotiated a separate bilateral deal that piled the pressure on Ottawa to jump aboard.
Early in the negotiations, Trump wanted Canada to join him to gang up on Mexico and force auto jobs north.
But Freeland and Justin Trudeau resisted, insisting the new NAFTA would be a three-country agreement — only to be thrown under the bus by the Mexicans.
Lessons have clearly been learned.
Canada has aligned with the Americans in slapping a 100 per cent tariff on Chinese EVs and a 25 per cent duty on steel and aluminum.
Meanwhile, the Mexicans have seen their bilateral trade relations with Beijing more than double to over US$100 billion in the past decade, suggesting the risk of leakage into the American market is very real.
This is part of the reason that in The Economist’s “Trump Risk Index,” Mexico is considered the most exposed country in the world to the president-elect’s trade and security policies.
As Flavio Volpe, president of the Automotive Parts Manufacturers Association, put it, the reality is stark. “There are two poles — Beijing and Washington and you can’t do business with both. You’ve got to pick,” he said.
It’s unlikely that toadying up to Trump is going to get on his good side — it’s not apparent that he has one.
But as he fills his cabinet, it is becoming a little clearer that the integration of the two economies means the impact on Canada may be less injurious than was feared in the immediate aftermath of his re-election.
Trump has just named Howard Lutnick, the CEO of brokerage Cantor Fitzgerald, as his commerce secretary, with direct responsibility for the U.S. trade representative’s office.
Lutnick is an enthusiastic proponent of tariffs and repatriating manufacturing.
He buys into Trump’s doctrine of squeezing friends and enemies to reduce the trade deficit and make money from tariffs.
But he was frank in an interview on MSNBC’s Squawk Box that tariffs are a bargaining chip that should not be put in place across-the-board.
“We should put tariffs on stuff we make and not put tariffs on stuff we don’t make,” he said.
Trading partners will respond to tariffs by re-negotiating trade terms and “their tariffs are going to come down.”
He dismissed Trump’s campaign talk about across-the-board levies. “When you’re running for office, you make broad statements so that people understand you,” he said. “Tariffs are an amazing tool but he understands that you don’t tariff what you don’t make. If we don’t make it and you want to buy it, I don’t want to put the price up.”
That could mean tariffs on Canadian-made autos, but Volpe said there is “no daylight” between Washington and Ottawa on auto policy. “We agree with the Americans on more localization of supply chains. We could not be more perfectly aligned commercially than we are,” he said, pointing to the high percentage of materials and parts in Canadian-made cars that originate in the U.S.
Energy exports are another area where Canada could be vulnerable, given Trump’s commitment to “drill, baby, drill” to increase domestic oil production.
Canada has a trade surplus with the U.S., in large part because of the soaring oil exports. In July, Canada exported 4.3 million barrels of petroleum a day, following the expansion of the Trans Mountain pipeline that began operating in May. This has been to Canada’s immense benefit as the price differential on this country’s crude has narrowed by $10 a barrel compared to last year.
But while Trump wants to increase production and eliminate the trade deficit, he has also promised Americans “the lowest cost energy and electricity on earth.”
Taxing crude imports from Canada would push up gas prices. Martin Pelletier, a senior portfolio manager at TriVest Wealth Counsel, said he believes oil and gas will be excluded from Trump’s tariffs, as the U.S. looks to Canada as a key supplier of low-cost energy. He said Canada might even replace out-of-favour suppliers like Venezuela, which exported 263,000 barrels a day to the U.S. in August.
This may all prove to be wishful thinking. If Trump did hit Canada with a blanket tariff, prompting Ottawa to retaliate, the ensuing trade war could cause real GDP to fall by 2.4 percentage points over two years and result in a five per cent reduction in export values, according to an analysis by TD Economics.
But the bank also concluded that this is a worse-case scenario and it is more likely that the threat will be used as leverage to force Canada to make concessions ahead of the USMCA renegotiation in 2026.
The supply management system that protects the dairy and poultry industries was an irritant during Trump’s first presidency, and he will be like a bulldog chewing a wasp when he finds out that the access he thought he had negotiated is still being disputed.
In this light, the legislation currently mired in the Canadian Senate that would take supply management off the table in future trade negotiations is pure madness.
There are other irritants, like the digital services tax that Canada has imposed on the tech giants.
But the relationship is simply too big and broad for Trump to blow it up over such relative trifles. While three quarters of Canada’s exports head south, this country is also the number one export destination for 30 U.S. states.
Freeland’s realpolitik over Mexico’s attempt to dance at two weddings suggests Ottawa has resolved not to give Trump any excuses to make any precipitous, ill-considered decisions.
National Post
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