Canadian political leaders have reacted to Donald Trump’s tariff threat with a stubborn lack of understanding about why the U.S. president-elect keeps targeting his country’s friendly neighbour. They still seem genuinely perplexed by Mr. Trump’s seemingly anachronistic concept of international trade, which they see as rooted in 19th-century mercantilism.
This helps explain why most of them are still expounding on the win-win virtues of Canada-U.S. free trade, despite Mr. Trump’s endless protestations to the contrary. They still seem to think that he is simply misinformed or has a shaky grasp of economics.
“Everything the American consumers buy from Canada is suddenly going to get a lot more expensive if he moves forward on these tariffs,” Justin Trudeau last week told CNN. “It’s bad for people who have for generations made things together and been successful together to actually start creating barriers between [their] economies.”
What Mr. Trudeau and most provincial premiers still do not seem to get, or are unwilling to concede, is that the Ricardian economic theory – which posits free trade between countries is always mutually beneficial and which guided U.S. policy in the pre-Trump era – has been abandoned for the foreseeable future in Washington, and not just by MAGA Republicans. Support for open trade has evaporated amid mounting evidence that it has undermined U.S. national security interests.
The Trudeau government has been derelict in failing to anticipate the consequences of this shift. During Mr. Trump’s first term in office, he made it abundantly clear that he thought Canada had been freeriding off of U.S. defence protection while its manufacturers and resource companies continued to enjoy unfettered access to the U.S. market, the world’s richest. He saw this as fundamentally unfair.
Had the Trudeau government responded then with a credible near-term plan to boost Canada’s defence spending to the 2-per-cent NATO target, we might not now be facing the threat of a 25-per-cent tariff on all exports to the United States. Instead, the Trudeau government dithered and prevaricated. Not even Russia’s 2022 invasion of Ukraine, after which other NATO countries ramped up defence spending amid pressure from Washington, seemed to shake Ottawa up.
Canada is now facing an existential threat to its economy, if not its sovereignty, as Mr. Trump threatens to punish countries he considers to be freeriders. “They don’t essentially have a military. They have a very small military; they rely on our military,” Mr. Trump said of us last week. “It’s all fine, but they’re going to have to pay for that.”
His threats are not rooted in vengeance or ignorance. They are backed up by recent research that challenges the longstanding consensus about the benefits of open trade for the United States. These studies argue that the United States has upheld the international trading system at considerable costs to its own economy and national security.
Because of its status as the world’s reserve currency, the U.S. dollar has been overvalued, undermining the competitiveness of American manufacturers. To make matters worse, some of the very countries benefitting from an overvalued U.S. currency to flood the U.S. market with their products also shirk their NATO obligations. And Canada leads the pack.
“America provides a global defence shield to liberal democracies, and in exchange, America receives the benefits of reserve status – and, as we are grappling with today, the burdens,” Stephen Miran, set to become chairman of the White House Council of Economic Advisers (CEA), wrote in a November paper. “This connection helps explain why president Trump views other nations as taking advantage of America in both defence and trade simultaneously: the defence umbrella and our trade deficits are linked, through the currency.”
Mr. Miran’s theories are intricately laid out in his paper, which was published before his nomination as CEA chair. There is not enough space here to describe them in detail. But suffice it to say, he sees tariffs as one way for the U.S. to recoup the cost of providing the U.S. defence umbrella to allies that fail to pull their weight in NATO.
“One can imagine a long list of trade and security criteria which might lead to higher or lower tariffs, premised on the notion that access to the U.S. market is a privilege not a right,” Mr. Miran wrote in his paper. Among them: Does the country “pay its NATO obligations in full?” Does it “support or oppose U.S. security efforts in various theatres?” Or do its leaders “grandstand against the United States in the international theatre?”
Canadian politicians offering token incremental spending on border security or threatening retaliatory tariffs on orange juice still fail to get it. It is going to take much more to satisfy or scare Mr. Trump. The trade-security paradigm has shifted. Our leaders should have seen it coming.