Canadians are rightfully concerned about the tariffs imposed on Canada by President Donald Trump. They should also be concerned about the failure of Canadian politicians to provide a reasoned response. This failure encompasses Justin Trudeau to Mark Carney (Trudeau’s advisor the past two years), and the provincial premiers.
The issue is certainly is not about fentanyl, nor do I agree with Prime Minister Justin Trudeau who thinks that the President is serious about annexing Canada—it is unrealistic, and I suspect even Trump knows that. Nonetheless, the President’s remarks about doing away with the border resonate, but in a different way.
When Trump looks at a map of the globe, he sees Canada and Greenland as the only buffer between him and a potential rocket attack from Russia, and the means to control the Arctic Ocean’s sea lanes. Trump is also concerned with the lack of manufacturing in the U.S. that resulted from various global trade agreements. This reduced American jobs but also made the U.S. strategically vulnerable. He wants to rectify that situation. As to Canada, fentanyl is a minor irritant, but its 200%+ tariffs on certain dairy products and the lumber trade dispute play a large role. I don’t think he is serious about annexing Canada—it is unrealistic and even he knows that.
How should Canada respond? So far, I have seen very little in the way of an intellectual response. There’s been no effort to negotiate any kind of settlement. Our response has been rather naïve—outside of lobbying, policies are focused on retaliatory tariffs, development of alternative export markets, promotion of ‘buy Canadian’, and reduction of inter-provincial trade barriers. If any of these policies were considered worthwhile, they should already have been implemented.
The first thing to note is that retaliatory tariffs will lead to higher inflation and, because we rely on the U.S. for machinery and other investment goods, higher future production costs. Further, the carbon tax should immediately be removed to help control inflation while facilitating international competitiveness. It is important to remember that the U.S. will remain our main trading partner, even with the 25% tariff, and we want to remain competitive with U.S. producers not facing the same tax. Finally, tariffs will cause the Canadian dollar to fall, but we really want to prevent that from happening because, while making Canadian goods more attractive in export markets, it leads to inflation that offsets this benefit. Inflation is the enemy that we want to keep under control.
The main Canadian response should be a willingness to negotiate a new relationship with the U.S. In my view, we need to negotiate a permanent Customs Union. The EU offers a blueprint! It began with the Coal and Steel Community (to ensure that neither Germany nor France could gain an upper hand producing war material), the European Economic Community, and the European Atomic Energy Community. Subsequently, the Maastricht Treaty (1992) created the European Union (EU) by combining these three Communities, while setting the stage for a single currency, the Euro.
Given the high degree of integration of the Canadian and U.S. economies, we must immediately begin negotiating with the U.S. to establish a Customs Union, which requires a single border (something missing from a free trade agreement such as the current USMCA). In this case, the Customs Union should have a common currency, which would reduce transaction costs.
Why are Canadian politicians hesitant to take a step towards further integration of the two economies? Is it fear of losing Canada’s identity? If so, perhaps that identity is inadequate to begin with, although I am confident that Canada’s identity and institutions can withstand greater economic union, just as Europe’s countries remain quite independent of one another. Perhaps politicians are held hostage by the dairy lobby given that supply management in the dairy sector remains a particular irritant to the U.S. Canada should see the removal of the dairy marketing system as a huge benefit. Three generations of agricultural economists have consistently argued that Canada needs to abandon supply management because of its nefarious cost to consumers, particularly poor families. Australia and the EU emulated Canada and also adopted supply management in the 1980s, but subsequently abandoned it in 2000 and 2015, respectively, primarily to gain or retain access to dairy export markets. Removal of the dairy quota regime would open export markets to Canada’s benefit.
Finally, we should negotiate Canada-U.S. defense infrastructure, while ensuring that Canada quickly expands its military contribution to NATO to at least 2% of GDP.
A serious willingness to negotiate these matters, and perhaps some others, could well obviate the tariff war and increase the wellbeing of citizens in both countries, while maintaining our Canadianism. Let’s hope our politicians can step up to the plate and negotiate, rather than simply implementing retaliatory measures and lobbying for special exemptions.