President Donald Trump is threatening Canada with tariffs of some 25%. The response of Canadian policy makers has been rather naïve. They seem not to have figured out what Trump is really wanting, although perhaps no one knows what he really wants. But the Canadian side has focussed on such things as retaliatory measures and lobbying by various Canadian politicians to ensure that certain Industries are protected. Additional responses have included implementation of an advertising campaign to get consumers to prefer Canadian products—a ‘Made in Canada’ preference.
It has even been proposed that, by lowering trade barriers between provinces, the Canadian economy can offset a trade war with the U.S. This begs the question: Why has this not already been done if it leads to such great benefit?
It is clear that Canadians do not want to be part of the United States. We do not want to become Americans. However, given Canada’s dependency on the U.S. economy, Canada’s lagging productivity, the inefficiency of separate currencies, and the effect of changes in the Canadian-U.S. exchange rate on prices in Canada (evident when purchases books!), I am surprised that a customs union with the U.S. is not on the table. Or at least it does not appear to be something that politicians north of the border consider.
The post World War II European enterprise can serve as a model for how Canada might approach the United States. In Europe, the Germans remain German. The French remain French, and the Dutch remain Dutch. This, despite the fact that the European enterprise has gone well beyond that of economic union. The Maastricht Treaty (1992) created the European Union (EU) by combining the three European Communities—the European Atomic Energy Community, the European Coal and Steel Community, and the European Economic Community—into a single entity. While it set the stage for a single currency, the Euro, most saw the Treaty as a first step toward an eventually political union. While the EU has taken large steps toward political union, the enterprise is not going as well as envisioned. The UK left the EU principally because it did not want to take orders from Brussels. The UK was interested in an economic union, but not political union.
The lesson for Canada is clear: we do not want political union, but should be open to a customs union with the U.S. This would essentially mean two things. First, it would effective eliminate the current border with respect to the trade in goods and services, and free movement of factors of production. Whether this would include labor would need to be addressed, although economists would argue that, from an efficiency point of view, it should. (I note that I work with Americans who live in the U.S. but work in Canada!) As a blueprint, one might begin with a Schengen-like border-free zone between Canada and the U.S., which allows people to travel between most EU-member countries without border controls. This would require a single border when it comes to trade. It would likely entail a border that protects both Canada and the US simultaneously—if a person qualifies to come to Canada, they automatically qualify to come into the US and vice versa.
A customs union would result in the demise of Canada’s supply managed marketing system for dairy, eggs, chicken and poultry. Of these, the dairy sector quota system is the most politically sensitive. It was on the earlier Trump presidency and a factor in the renegotiation of NAFTA, which became USMCA. The dairy sector is again targeted by the Trump administration. Canadian agricultural have railed against the dairy quota since the 1970s, more recently making the case that, by getting rid of supply management, the sector would benefit from access to lucrative international markets as has New Zealand. Should protection of supply management result in economic calamity for the country as a whole?
Second, monetary union under those circumstances makes a lot of sense. It would be simple to implement. For example, we might say that one Canadian dollar is on par with a U.S. dollar, or that it is equal to USD 0.85 or 0.90. The exact value is less important as wages and other costs will adjust with increases in Canadian productivity that will then lead to increases in wages. One has to be realistic about such a thing. Finally, Trump insists that Canada commit 2% of its GDP to defense. I would argue that, given a willingness to negotiate an economic union, and a commitment to increase defense spending to meet the 2% target by 2030, would be sufficient to forestall the implementation of the Trumpian tariffs. If a customs union were a threat to Canada’s viability, to our dominion, then we do not deserve to be Canadian.