Ever since Donald Trump threatened economic war with the United States’ closest trading partners, the consensus has been that 25-per-cent tariffs on Canada and Mexico will hinder the U.S. economy, but ravage its allies. And now that the U.S. President has gone through with it, the targets of these tariffs are occasionally painted as suckers. On Tuesday, a Wall Street Journal headline claimed that Canada and Mexico “gambled” on free trade, only to watch it backfire spectacularly.
What’s missing from this narrative is that the U.S. was just as willing to roll the dice on free trade and also reaped benefits – not just from the North American trade partnership, but from the globalized economy that’s proliferated over the past four decades. And while the short-term inflationary pain that comes from Mr. Trump’s plan to tear up trade agreements may be manageable, the geopolitical carnage will be much more bruising.
For all the talk about the U.S. being taken advantage of by its trading partners, the global trading system that existed until Tuesday put Washington at the centre of the universe, and the clout that came from that is almost incalculable.
“Nobody has benefited more from globalization,” Clark Packard, a research fellow at the right-leaning Cato Institute in Washington, said of the U.S. in an interview. While the gains have been uneven across the American population, unemployment has been hovering near record lows, U.S. economic growth has been among the best in the developed world for years and the country is highly influential in global commerce.
Opinion: Donald Trump is trying to destroy Canada
For decades, it was widely accepted that the U.S. dominated geopolitics because of its military prowess. But the country’s economic might and the power of the U.S. dollar were just as persuasive. The American-led economic order, for instance, used sanctions to sideline Russia from a good portion of the global economy after Vladimir Putin invaded Ukraine.
For decades, trade has been central to dictating this order, and the terms and rules have been heavily influenced by the U.S. through institutions such as the World Trade Organization. Mr. Trump seems more than willing to let this go up in smoke.
“To me it’s just shameful what we’re doing,” said Bill Reinsch, a senior adviser at the non-partisan Center for Strategic and International Studies in Washington who previously spent 15 years as president of the National Foreign Trade Council, representing multinational companies on international trade and tax policy issues. “We spent 75 years building a system of mutual trust and mutual confidence,” he added, and this order removed what he dubbed “the law of the jungle” and also deterred global wars.
A tariff war, he argued, will also hit foreign direct investment in the U.S. because companies looking to make large capital investments tend to value three things: the rule of law, policy stability and a mechanism for commercial disputes. “Trump is in the process of trashing all three of those,” he said.
The irony of all this is that Mr. Trump’s desire to burn it all down is driven, in part, by dreams of keeping China at bay. “Many elites in the United States have bought in to the notion that we are losing ground to China economically, and that the only way to combat that is to retrench and become isolationist,” said Inu Manak, a fellow for trade policy at the Council on Foreign Relations in Washington.
There are many reasons to take issue with China. President Xi Jinping, for instance, ignored many international trading norms while prospering from the global economy. China heavily subsidizes key industries and that helps it flood the world with cheaper products, such as electric cars.
Yet the carnage the U.S. is creating is so widespread, with pain inflicted on allies, that it could make it harder for Mr. Trump to achieve his goal of curtailing China’s dominance. For years, Canada has followed the U.S.’s lead on many foreign-policy matters, such as enacting steep tariffs on Chinese cars in 2024. The longer the U.S. acts like an adversary, the more likely it is that Canada and other countries will flout its orders.
For all the panic, it’s possible Mr. Trump will back down, especially if U.S. businesses pressure him. But at this point, it’s all so uncertain.
“I don’t see any political leader in the Republican Party willing to take on Trump on trade, save for Rand Paul,” Ms. Manak said, “and that is a major threat to the future of U.S. economic prosperity and our international standing.”
A timeline of Canada’s free-trade agreements with the U.S.
The Canada-U.S. Auto Pact, 1965
Negotiated by the administrations of president Lyndon Johnson and prime minister Lester Pearson, the Auto Pact lifted tariffs on vehicles and parts moving between the United States and Canada, laying the groundwork for future broader trade deals. As part of the deal, major U.S. car makers agreed to keep a certain level of production in Canada.
Canada-U.S. Free Trade Agreement, 1989
Following the success of the Auto Pact, the governments of president Ronald Reagan and prime minister Brian Mulroney inked the Canada-U.S. Free Trade Agreement to expand free trade between both countries. Signed in early 1988 and effective Jan. 1, 1989, the deal was intended to phase out trade restrictions over a 10-year period.
North American Free Trade Agreement (NAFTA), 1994
NAFTA created a trilateral trade zone for the first time by bringing Mexico under the free-trade umbrella. Negotiated by prime minister Brian Mulroney, Mexican president Carlos Salinas de Gortari and U.S. president George H.W. Bush, the deal faced strong pushback in both Canada and the U.S. before it was ratified.
United States-Mexico-Canada Agreement (USMCA), 2020
USMCA was signed after newly elected U.S. president Donald Trump objected to the NAFTA deal and insisted on reopening the accord with Prime Minister Justin Trudeau and Mexican president Enrique Peña Nieto. The deal would further integrate the three economies and remove more trade barriers, including strengthening the enforcement of labour laws, protections for Indigenous communities and increasing co-operation of regulatory agencies.
What questions do you have about tariffs?
The tariffs announced by U.S. President Donald Trump have upended decades of free trade in North America, causing chaos on both sides of the border.
Alongside the chaos come many questions about how this will affect Canadians' lives, and Globe reporters are here to help you navigate those. Perhaps you're curious about how this might impact the sector you work in, or maybe you'd like to know what this means for your mortgage. Tell us what you want to know about these new levies, and we'll do our best to answer. Please submit your questions below or send an email to audience@globeandmail.com with "Tariff Question" in the subject line.