Canada at Trade War

Canada at Trade War by Maj (ret'd) CORNELIU. CHISU, CD, PMSC, FEC, CET, P. Eng. Former Member of Parliament Pickering-Scarborough East Canada is facing a serious economic and existential threat from our powerful neighbour, the United States of America. Once seen as a successful trading relationship, reality is now kicking in. On March 4th the United States imposed a 25% tariff on all Canadian goods exported to them except energy of 10%. Since the United States first threatened this trade war in late November, there has been a lot of confusion, misdirection, and wasted time in Canada. As the tariffs finally come into effect, there is a sense that Canada’s response is only being conceived in haste and superficially. A major source of the lag has been a mistaken interpretation of the Trump administration’s motivations. The whole Team Canada campaign involving Prime Minister Trudeau, Ontario Premier Doug Ford, and various other business, civic, and political leaders took for granted that Trump’s tariff threat was best understood as a negotiating tactic. His ultimate intention was not to impose tariffs, but to induce concessions out of Canada on defence, security, and trade. They proved to be wrong. Therefore, Canada spent several months dithering over possible proposals to put on the table that might effectively buy President Trump off. All our politicians seemingly had ideas, but not good ones. Many of them, such as boosting defence spending to 2 percent of GDP, reforming Canada’s asylum policy or liberalizing Canada’s supply-managed sectors were considered good ideas. The problem was that Trump did not really care about any of this stuff. His real motivation, was two-fold: first, to generate tariff revenues to offset tax cuts in the short term and, second, to bring an end to borderless trade on the continent over the longer term. Trump’s goal in short is to effectively abrogate the CUSMA free trade agreement in the name of solving his own budget gap and boosting production in the United States. The Trump-Vance policy bet is that a 25-percent tariff access to the U.S. market will represent such a high economic cost to access the U.S. market that companies will be prepared to absorb the short-term disruption of moving product mandates, production lines, and even entire facilities from Canada and Mexico to the United States. It seems clear that neither the Trudeau government nor the Conservative opposition had the capacity and knowledge to understand this and get prepared. Notwithstanding the various justifications put forward by Trump and his administration, the principal goal of the tariffs is now abundantly clear: pull production out of Canada and Mexico into the U.S. Viewing that our economies are intertwined and 75% of Canadian trade is with the United States, this action might have severe effects on the Canadian economy. Personally, I think a tariff war would be severely detrimental for Canada if Canada tries to reciprocate dollar for dollar. Cooler heads should prevail and further negotiations should be conducted once Canada has a new Prime Minister. However, if the tariffs persist for a longer time, as they are now imposed, they can be expected to have devastating consequences for the Canadian economy. This tariff war will come down hard on Canada’s economy and if tariffs remain in place for one year, the economy will certainly face the risk of a recession. The tariffs are also expected to raise prices, which will add to increased inflation. The two-way trade between Canada and the U.S. is worth $1.3 trillion on an annual basis. Statistics Canada says nearly 1.8 million Canadian jobs, 8.8 per cent of the country’s total employment worked in industries where 35 per cent or more of jobs depended on U.S. demand for Canadian exports. Nearly 1.4 million American jobs are tied to Canadian exports and 2.3 million Canadian jobs are tied to U.S. exports, according to the Canadian Chamber of Commerce. As a consequence, we will probably see a rise in overall unemployment, seeing that manufacturing in central Canada will be hit hard, the auto sector in particular. The industry will be impacted on both sides of the border, but more so on the Canadian side. Economists expect Canadian unemployment to rise to eight per cent as the result of the tariffs. The Bank of Canada estimates that a trade war with the United States would cut business investment by 12 per cent and decrease Canadian exports by 8.5 per cent after the first year. The Bank of Canada also estimates Canadian growth would decline by three per cent over the next two years. Bank of Canada governor Tiff Macklem said in a speech last month that there would be no “bounce back” for the Canadian economy, like the one seen during the COVID-19 pandemic. Well these Trump tariffs were just the first round of trade actions promised by the Trump administration, with an additional 25 per cent levy set to be imposed on Canadian steel and aluminum exports on March 12. Trump has also promised to impose “reciprocal” tariffs, which could potentially match Canada’s digital sales tax on April 2. As a consequence, the proper Canadian policy response should not begin and end with retaliatory tariffs. It must instead prepare for a post-CUSMA world. This has various implications for Canadian competitiveness, continental supply chains, and the future of Canada-U.S. relations. The key point is that Canadian policymakers must reorient their understanding of the problem facing the country. We are experiencing a paradigmatic moment for North American integration. Market forces will no longer dictate the distribution of production across the continent. Politics and policy will regrettably play a greater role. Canadian policymakers must catch up and conceive of a vision and agenda to strengthen our cost competitiveness and the case for Canada. We are living in a new, fast-evolving environment and we do not have much time to figure it out. For example, Canada’s energy industry has long been a pillar of our economy, providing jobs, economic growth, and reliable energy. It’s also a key bridge between us and our closest ally to the South. However, the global landscape is shifting rapidly. In recent weeks, it has become clear that our relationship with America has fundamentally changed—and we must act with urgency to focus on Canada’s national interest. Let’s be clear: Canada and the U.S. will always have a close, mutually important trade relationship—immutable laws of geography and economics dictate it. It is impossible for Canada’s energy industry to completely disengage from the world’s largest energy market next door, while also being quite literally tied to it through shared pipelines and infrastructure. However, growing geopolitical uncertainty, rising global energy demand, and intensifying competition mean we can’t afford to be complacent. Since 2015, about $280 billion in energy projects have been cancelled in Canada while competitors have surged ahead. The U.S. has become the world’s top liquefied natural gas (LNG) exporter, while Canada’s first major LNG project won’t be operational until mid-2025. These delays cost us not just revenue and jobs, but opportunities.With decisive leadership, smart reforms, and a renewed commitment to investment, we can unlock our full energy potential, support our partners and make new ones, create jobs, and achieve a more secure and prosperous future for all Canadians. The time to act is now.