This week we witnessed the fallout from U.S. President Donald Trump’s “America First” strategy. It was a fiasco for markets with tariffs threatened against two allies — Canada and Mexico at 25 per cent (10 per cent for Canadian energy) — and levied against one foe, China, at 10 per cent.
Trump is already basking in another “victory” while many will say he balked because of the disruption. Canada and Mexico agreed to toughen border security and curb fentanyl smuggling across the border, which was the focus of the executive order issued last Saturday.
The United States has agreed to hold off on the tariffs for 30 days. The market regained its confidence that future Trump tariffs will only be temporary, or won’t materialize at all.
But this is just the first salvo. On Monday, Trump suggested that he will put new tariffs on Europe. Overall, Trump’s tariffs are intended to draw manufacturing to the U.S., raise revenues to afford income tax cuts and pursue remedies to reduce trade deficits and strengthen security arrangements.
If tariffs — even low ones — become a permanent feature of U.S. policy, it will lead to a reordering of global trade. The America First strategy will not only lead to greater domestication of supply chains, it will draw many countries towards China’s orbit. There are far better ways for Trump to accomplish his objectives than engaging in a trade war with allies.
This is what Canada must understand as it develops its own strategies in future years. We should remember there is a bigger geopolitical picture in which western allies will consider a common strategy to deal with American nationalism.
So, what should Canada do? In the short run, we can retaliate, but it will only be effective if other countries join in. A 40 per cent global tariff could reduce world GDP by three per cent, but it would have a greater impact on small, open economies like Ireland (6.7 per cent) and Canada (4.2 per cent), with the U.S. losing only one per cent of its GDP.
Nevertheless, American voters won’t like higher consumer prices and any slowdown in the U.S. economy. This will push the Republicans and Trump to reverse any tariff confrontation. In that case, there is little more for Canada and others to do but wait.
There is a better approach: make trade and security work better for Canada through diplomacy. Our low spending on defence, the digital services tax, tax on streaming companies, limits on foreign ownership in telecoms and banking and, of course, supply management, will be challenged by the U.S. in upcoming negotiations.
These trade obstacles actually hurt, not help, our economy. We have our irritants, too, including “Buy American” policies, the historic softwood lumber dispute and the Inflation Reduction Act subsidies. These issues will need to be resolved, hopefully, by a strengthened NAFTA 3.0 agreement that makes “North America Great Again.”
However, our most important economic strategy is to wake up the Canadian economy. Trump knows that the strong U.S. economy can withstand a recession better than its western allies that have experienced weak growth over the past decade.
Canada’s real per capita GDP from 2015 to 2023 has been almost flat, cumulatively rising by only two per cent in eight years. The major European countries and Japan have only done somewhat better at six per cent. Meanwhile, U.S. per capita GDP has outpaced other major countries at 15 per cent.
Obviously, Canada could strengthen our internal market by removing interprovincial trade barriers. With respect to international trade, Canada is faced with two choices: trade diversification or deeper relations with the United States. Over 90 per cent of our two major exports — energy and autos (both accounting for a third of our global exports) — head to the U.S.
Our car industry is wholly dependent on U.S. and foreign companies that allocate capital to the most competitive plants. If Mexico is more efficient, they will export from there to third countries, not from Canadian plants. It is hard to see us diversify trade in autos without breaking the ties that began decades ago with the Canada-U.S. Auto Pact.
Energy is different. In the past decade, we could have diversified our energy sales and improved productivity with resource development. Instead, the Trudeau government blocked pipeline approvals (except Trans Mountain) and liquefied natural gas projects, with cumbersome mandates, taxes and regulations.
Meanwhile, the U.S., Norway and Australia have deepened exports of LNG and oil, while pursuing new renewable energy markets, especially in Europe, as it looks to reduce its dependency on Russian energy.
Today, we are being offered two very different approaches to growth. One is to develop our resources, including oil pipelines and LNG plants. The other is to stiffen our climate policies to quicken the energy transition towards renewables — a risky growth strategy for a country with a limited long run comparative advantage.
Conservative Leader Pierre Poilievre offers the former strategy. Liberal leadership hopeful Mark Carney, who released his carbon strategy late Friday (in the heat of the tariff discussions), proposes the latter.
Given our disappointing productivity performance and our neighbour’s growing nationalism, Canadians will be focused on a vision for Canada’s economy in an uncertain world. In this light, carbon policy will be the fundamental issue in the next federal election as a response to tariffs and low productivity. Mark my words.
National Post