President Donald Trump salutes while on stage at the 60th Presidential Inauguration, on Jan. 20, at the U.S. Capitol in Washington.Al Drago/The Associated Press
U.S. President Donald Trump has for months been threatening to slap tariffs on Canadian exports. Canada has responded with denial, accommodation, education and, coming soon, retaliation. Call them the first four of the five stages of bargaining with economic change.
If Mr. Trump carries through on his threats – which he reiterated on Monday, saying he was “thinking” of imposing a 25 per cent tariff on Canada as of Feb. 1 – Canada may have no choice but to move on to the fifth and most painful step: adaptation.
Let’s review where we are, and how we got here.
Our first response was denial: He couldn’t be serious, could he?
Next came accommodation. If Canada just beefed-up border security, as Mr. Trump asked, then all would be well. And that may yet do the trick. But probably not entirely.
We moved on to education. Don’t the Americans understand that we’re their biggest customer? And if they make us poorer, we’ll buy less from them? It’s a good argument, and has the virtue of being true. But it may not be enough.
Which is why Canada is preparing for retaliation. Ottawa has a list of $37-billion worth of U.S. imports to target, with a follow-up package of $110-billion more.
All of this is about trying to save the status quo. And that status quo – continental free trade – is worth saving. All tools must be tried. They might work.
But there’s mounting evidence that Mr. Trump, and some though hardly all his economic advisers, do not see tariffs as a threat to be brandished to extract concessions elsewhere, or to be exchanged for other goals. Tariffs, at least on some countries and products, are not a negotiating tool. They’re not a detour. They’re the destination.
If tariffs on Canada turn out to be the destination, we will be forced to move to the final stage of coping with economic loss: adaptation.
If we can’t change the economic weather created by American protectionism, our only choice will be to adapt to it.
A climate in Washington that used to be cool to protectionism was heated up by the first Trump administration, further warmed by president Joe Biden and will continue boiling under the second coming of Mr. Trump. The main target is China.
Take the Biden administration’s tariffs on Chinese electric vehicles, and subsidies to domestic manufacturing, which Canada matched with tariffs and subsidies of our own. The goal is blocking imports of Chinese-made cars, while pushing automakers to invest more in North America. It’s a piece of a broader strategy aimed at what Mr. Trump and Mr. Biden both promised, namely re-industrializing America.
Again, China started out as the main target of this plan to reverse the flow of industrial production out of the U.S., and turn it into a flow of production moving back to the U.S. It makes sense, because Beijing is a U.S. strategic rival, and does not practise free trade. But Mr. Trump has changed the course of the discussion, from using tariffs against China to preserve free trade, to using tariffs against all countries, and against free trade.
His rhetoric is consistently that free trade, even with allies, is a rip-off, and that Make America Great Again means less free trade. He’s also become fixated on the claim that tariffs can work economic and fiscal magic – rejuvenating the economy while funding the U.S. government.
“Instead of taxing our citizens to enrich other countries,” Mr. Trump said on Monday in his inaugural address, “we will tariff and tax foreign countries to enrich our citizens. For this purpose, we are establishing the External Revenue Service, to collect all tariffs, duties and revenues. It will be massive amounts of money pouring into our treasury, coming from foreign sources.”
To the extent that Mr. Trump is serious about de-integrating the global economy, and not simply targeting China, Canada is in the crosshairs. As a result of a trend toward continental supply-chain integration that started with the 1965 Canada-U.S. Auto Pact, a lot of Canadian industry is basically a cog in a U.S.-centred production chain.
As such, an investment in producing something in Canada has long been an investment in selling to the whole North American market, and vice versa. That’s been good for both the U.S. and Canada.
But what if the Trump administration scraps that? Or restricts free trade to commodities but not manufactured goods? Canada could be the low-hanging fruit in a plan to lure more manufacturing back to the U.S.
Persuading a multinational to move a factory from Guangdong to Michigan is hard. Persuading it to move from Ontario to Michigan is less so.
The future could be something of a throwback to the North America of a few generations ago, when the two economies were much more separate. The U.S. had tariff walls against the world, and Canada had the National Policy of tariff walls against the U.S.
If the Trump administration uses tariffs to de-integrate the North American economy, Canada will have no choice but to look to history and the future, and adapt. It would be, however, a long, painful transition that would make everyone poorer, on both sides of the border.
Hopefully it doesn’t come to that. But with Donald Trump, anything is possible.