In his inaugural address, U.S. President Donald Trump declared that he would overhaul the American trade system and establish an External Revenue Service to collect “massive” tariffs, duties and other revenue. Later that day, he said he was considering imposing tariffs on Canada and Mexico on Feb. 1.
Canada is targeted for political, economic and ideological reasons, some defensible, others divorced from the facts. To protect our national interest, the government must understand his mindset, navigate a perilous landscape and respond convincingly to his more reasonable demands.
In front of joyful supporters and cowed opponents at his inauguration, Trump proclaimed what has been a theme of his campaign: “We will not allow ourselves to be taken advantage of any longer,” and “I will very simply put America first.”
This means that transforming America’s international economic and security relations will be a high priority for the new administration. For the president, the exploitation of his superpower’s generosity is manifested by large trade deficits, unfair trade practices and inadequate military expenditures by ungrateful allies.
Detractors claim that Trump is purely transactional, with no worldview or strategy. In fact, there is a conceptual framework for his tariff policy that Prof. Daniel Drezner encapsulates in an academic term best avoided at a dinner party: hypocritical post-neoliberalism.
Liberalism supports a global world order and free trade (think Prime Minister Justin Trudeau). Neoliberalism favours free markets and minimal regulations (think former U.S. president Ronald Reagan and former British prime minister Margaret Thatcher). Post-neoliberalism, as practised by U.S. presidents Joe Biden and Donald Trump (to differing degrees), imposes tariffs, export controls and sanctions.
The hypocritical, or tactical, approach to post-liberalism uses tariffs to achieve industrial and national security goals, aided by the strength of the U.S. economy and surging consumer demand for foreign products that counteract trade barriers. The key issue is whether Trump’s threatened tariffs are tactical and can be negotiated away.
The president’s economic objectives are to strengthen American industrial might, provide jobs for neglected blue-collar workers, contain energy prices, assure energy independence, minimize supply chain dependency, eliminate dumping and theft of intellectual property and reduce trade deficits.
When it comes to Canada, his focus has been on illegal immigrants and fentanyl crossing the border, free riding on defence and an early renegotiation of the USMCA, with supply management a continuing irritant.
Contrary to the president’s claim, the U.S.-Canada trade relationship is highly beneficial to his country. As TD economists Marc Ercolao and Andrew Foran pointed out recently, Canada is America’s biggest export market. In the first three quarters of last year, goods and service trade between the two countries totalled $910 billion — or $3.6 billion a day.
Last year, the U.S. trade deficit with Canada was US$45 billion (C$65 billion) — not $200-250 billion, as Trump claims — or 0.2 per cent of its GDP, representing only four per cent of its total trade deficit. Excluding Canadian energy exports of $170 billion, the U.S. had a trade surplus of $60 billion.
That is relevant because America purchases Canadian energy at a significant discount. The alternative would be to pay higher prices to Venezuela, an unstable and unfriendly country, which would be inflationary and increase America’s global trade deficit. (A 25 per cent tariff on Alberta oil would raise the price of a gallon of gasoline by upwards of 70 cents.)
Furthermore, Ontario is a major exporter of electricity to Michigan, Minnesota and New York, powering 1.5-million homes, and Canada supplies the U.S. with many critical minerals.
These facts will matter in the longer term, but the immediate crisis must be addressed first. A 25 per cent tariff would likely drive Canada into a recession, cost hundreds of thousands of jobs and exacerbate capital flight, with implications for productivity and economic growth.
The government has to secure the border immediately, not only to address Trump’s concerns but to prevent guns from coming from the U.S. and to be ready for an influx of undocumented migrants who face deportation. We must also meaningfully build up our military, spending at least two per cent of GDP on defence starting this year.
However, a prorogued Parliament cannot authorize the necessary expenditures for both initiatives. As Mary Anastasia O’Grady observed in the Wall Street Journal, “Canada is paralyzed.” Thank Trudeau for prioritizing narcissism and partisanship over the national interest.
Then there’s supply management, which Quebec wants taken off the negotiating table. However, it is unreasonable for 4,333 Quebec dairy farmers to jeopardize the economic well-being of 42 million Canadians.
Compensation can be offered for quotas and paid for by a temporary tax, which would be more than counterbalanced by substantial consumer savings on the price of milk, cheese, eggs and poultry, especially for the poorest Canadians. External threats may finally end this harmful cartel.
Canada should quickly comply with Trump’s demands that are in our national interest (so he can declare a victory), highlight the benefits of trade to Americans, agree to quickly start renegotiating the USMCA and only impose targeted retaliatory tariffs as a last resort.
One final urgent matter: according to a recent poll, 77 per cent of Canadians want an immediate election so that a new government, armed with a clear mandate, can negotiate from a position of strength.
National Post
Joe Oliver was minister of natural resources and minister of finance in the Harper government.