Tariffs on the rest of the world would reduce the investment flowing from those countries to the U.S. If Canada simultaneously allows greater net imports from Europe and Asia, our capital inflows from those countries can rise.Justin Tang/The Canadian Press
Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.
It is lamentable that the United States is tearing apart century-old alliances and hard-won trade agreements. We have benefited enormously from the American-led international order, under which free trade has flourished, and people’s basic freedoms and human rights have been expanded, albeit imperfectly. But while trying to mitigate the damages of the new U.S. administration, we ought not be blind to the opportunities that the resource-power vacuum offers for Canadian policy abroad.
The rest of the world no longer feels that the United States is a reliable partner. Friedrich Merz, Germany’s newly elected chancellor-in-waiting, has stated he intends to pivot away from strong ties with the U.S. France has signalled that it will scale up its military to reduce reliance on that country. Singapore has fretted publicly that the United States has become an unpredictable trade partner.
To a first approximation, this global fracturing is a disaster. But at a more granular level, it also means these countries will be looking for new markets to park their exports, new sources for strategic resources and more collaboration on military and aid objectives. Each of these avenues can be a silver lining for Canada if we are pro-active.
What is lost from the Trump tariffs can be recuperated in part by deepening our trade ties with Europe and Asia. As of yet, the Canada-European Union Comprehensive Economic and Trade Agreement was only provisionally applied in 2017, and still has to be ratified by 10 holdout countries. In Asia, Canada already has the Comprehensive and Progressive Agreement for Trans-Pacific Partnership from 2018 but U.S. President Donald Trump’s threats of tariffs has countries with large surpluses such as Japan and Vietnam scrambling to diversify their trade networks further. The geopolitical landscape has shifted dramatically since the conceptualization of these agreements, and the resource needs of these nations are only likely to grow under the new world order.
Negotiators can argue more compellingly now than ever that Canada is the ideal partner, with both the reliability and crucial goods that the rest of the world is so desperately lacking. We can take advantage of this new demand to open markets for Canadian mining and energy exports, as Canada is a crucial source of critical minerals, and could be for liquefied natural gas, for many of these countries. While future trade agreements may require breaking the influence of domestic industries that have traditionally benefited from protectionism, this may be possible now given our new-found willingness to sacrifice for our country.
Tariffs on the rest of the world would also reduce the investment flowing from those countries to the U.S., simply because its current account (goods being bought) and capital account (investments flowing in) must balance. If Canada simultaneously allows greater net imports from Europe and Asia, our capital inflows from those countries can rise – combatting our long-standing investment deficit. European capital markets have always been less attractive than their American counterparts and that capital can be enticed to Canada if we play our cards right.
Governments rarely internalize this benefit of having lower trade surpluses, preferring to minimize domestic market share lost to foreign competitors. It is a balancing act, to be sure. But with the understanding that our capital supply is in a rut and that trade overall still creates value, this is an enticing reason to increase imports from other partners.
A chaotic geopolitical climate is also an opportunity to redefine Canada’s role on the world stage and carve out significantly more influence toward our interests. Canada has punched below its weight on foreign policy for far too long; we have a larger GDP than Russia, but a fraction of the voice. As Mr. Trump abandons NATO and cuts almost all foreign aid, those gaps in military resources and diplomatic support will need filling.
Dramatically raising our military spending, pledging stronger political support for Ukraine and increasing foreign aid are simple ways to accomplish this. Increasing military expenditure would have been wise even without the new American administration, as our military capabilities are currently in disarray and allies have repeatedly raised concerns about our level of commitment. This has diminished our ability to set a part of the global agenda.
Defence spending also has the added benefit of spillovers for innovation – which the private sector can commercialize and translate into wage gains for Canadians. Increasing aid and taking a leading role on Ukraine are not only the right things to do, they also garner goodwill from partners that will be increasingly important for navigating belligerent powers.
Under Mr. Trump, the rules governing the international order have changed. Canada gets to decide if it wants to be a leader or a spectator in this new system. We can no longer lean on the liberal optimism of the 1990s, where national security was taken for granted and trade was a purely economic exercise. We must adapt. As painful as America’s transformation is, it has also given us the chance and the obligation to do so.