It was Canadian author Ronald Wright who noted that each time history repeats itself, the cost goes up.
In a press conference held at a cabinet retreat in Quebec, Justin Trudeau was asked whether he is frustrated that Donald Trump is once again threatening to impose tariffs on Canada.
“We’ve been here before,” he said. “The first Trump presidency represented moments of uncertainty and threats of instability, and we were able to work through that constructively.”
That’s true. But in his first term, Trump did not threaten to charge an extra 25 per cent on everything crossing the border.
Trudeau’s tone was measured — as it has to be — talking about how Canada, as a reliable partner, is ready to help a booming U.S. economy with more energy, more steel and more lumber.
But he said that, in principle, he supports the idea of dollar-for-dollar matching tariffs.
He said 25-per-cent tariffs would be paid by American consumers, and matching tariffs would be paid by Canadian consumers. “There will be costs for Canadians and we will be there to support and compensate Canadians and Canadian businesses,” he said.
But that implies rising prices on both sides of the border.
That is certainly what the modelling suggests would happen in the short term. A Bank of Canada analysis in 2019 on the impact of 25-per-cent tariffs imposed by the U.S., and symmetrical retaliation by Canada and others, predicts short-run price increases of 4.5 per cent in Canada and 3.7 per cent in the U.S.
Prices would continue to rise by 8.2 per cent in the long run in the U.S.
With Trump it is always best to go by what he does, rather than what he says
But prices in Canada would actually fall in the longer term.
That’s the good news. The bad news is that Canadian consumers would be too poor to purchase things.
“This can be attributed to the fall in demand and the contraction in GDP,” the bank’s study said.
Canada depends on trade for two-thirds of its economic output. The U.S. is far less reliant: trade accounts for around one-quarter of GDP.
In this game of bluff and counterbluff, any Canadian government has to raise the prospect of retaliation. But let’s not get silly — as Liberal leadership candidate Chrystia Freeland did during her campaign launch at the weekend, when she told her supporters: “We are ready to fight.”
The results would be like the Polish cavalry charge confronting German tanks on the first day of the Second World War.
It is a time for calm heads. Trump told reporters late on Monday that he is minded to impose 25-per-cent tariffs on Canada and Mexico on February 1st.
But his actions undermined his words, and with Trump it is always best to go by what he does, rather than what he says.
He did not include the imposition of tariffs in the list of 26 executive orders released on Monday.
Stock markets rallied and the U.S. dollar dipped on the news (markets gave up gains later in the day when Trump spoke to reporters about imposing tariffs next week).
Multiple press reports suggest the debate on how soon and how hard to impose tariffs is still going on within the new administration.
Trump has directed federal agencies to investigate persistent trade deficits, unfair trading practices and alleged currency manipulation.
The deadline for the investigation is April 1st and much of it appears to be directed at America’s trade deficit with China. The memo calls for the U.S. Trade Representative to assess China’s performance regarding the deal signed in 2020 that required China to increase its purchase of U.S. exports.
It also calls for a review of China’s most-favoured-nation trading status and look at other practices that might be deemed “unreasonable or discriminatory.”
In short, despite Trump’s rhetoric, Canadian policy-makers must be starting to suspect that they are not in the crosshairs; that any tariffs will be short-lived and imposed as a bargaining chip to extract concessions.
Canada is the largest export market for the U.S. and is the source of the second smallest trade deficit, owing largely to U.S. demand for Canadian energy. The deficit is the byproduct of America’s economic over-performance compared to its trading partners — a source of strength, not weakness.
Unlike trade deficits with China, this is not an emergency, and Americans don’t see it as such.
In a new poll for Postmedia by Leger, 53 per cent of Americans were opposed to proposed tariffs on Canadian goods, while two-thirds of Americans predict that tariffs would increase consumer prices.
The president continued to complain on Monday about the “vast numbers of people” and fentanyl flooding across U.S. borders.
Yet, as Trudeau pointed out on Monday, less than one per cent of fentanyl and illegal immigrants enter from Canada, and the federal government is spending a further $1 billion to police the border.
The real question is: what else does Trump want?
It seems clear that increased defence spending among allies is part of the mix, and Ottawa should offer some reassurances that there is a plan to get to the NATO target of two per cent of GDP military spending long before the current date of 2032. That may involve committing to the purchase of U.S.-made equipment.
The new administration has also indicated that it will stop buying oil from Venezuela, the source of 220,000 barrels a day last year. “We don’t have to buy their oil,” Trump said.
Canada has the capacity to pick up the slack with the heavy oil that U.S. refineries need.
Another resource Trump covets is Canada’s water. He issued an executive order on Monday to provide water from California’s Sacramento- San Joaquin Delta to other parts of the state to help combat forest fires. But last September, he talked about “a large faucet” in British Columbia that could be tapped because “Canada has got more water than they could ever use”. He appears to have been talking about the Columbia River that flows through B.C. before heading into Washington and Oregon. Presumably he could divert water from those northern states, without involving Canada, but he may not have gotten that far in his thought process.
Regardless of the practicalities, Trump seems to want Canadian water, while Canada has legislation that bans bulk water exports for environmental reasons.
If that is his endgame, we are on a collision course.
But it seems more likely that his goal is to overhaul the trade system to rebalance Chinese trade surpluses.
He also sees tariff revenues from all foreign countries as a means of funding income tax cuts, without exacerbating America’s worsening debt-to-GDP ratio.
His problem is that an extended trade war with Canada would fire up inflation and prove unpopular with American consumers and financial markets.
This offers grounds for hope that history will repeat itself, that, even if it involves brief skirmishes, peace can be maintained and both sides can claim victory.
In the meantime, Ottawa should prepare for a trade war, in case that Trump, for once, lives up to his word.
National Post
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