Newsletter: It’s Trump’s world. What’s Canada’s plan now?

Trump’s big comeback 

The presidential election that was supposed to be on a knife-edge turned out to be not so close after all. Donald Trump’s victory was decisive. And Republican control of the Senate gives Trump even more power in areas crucial to Canada, such as ratifying trade deals. 

The Trudeau government put the best possible face on the situation, with the Prime Minister congratulating Trump and stressing that “Canada and the U.S. have the world’s most successful partnership.” Justin Trudeau noted the two countries successfully renegotiated the continental trade deal during Trump’s first term and cross-border trade now amounts to more than $3.5 billion every day.  

Deputy PM Chrystia Freeland called the new USMCA/CUSMA “Donald Trump’s deal” and said “he’s proud of it – and I think he’s right to be proud of it.”  

The government clearly hopes the incoming president feels ownership of the renegotiated pact and won’t feel the need to make big changes, at least as far as Canada is concerned (Mexico is a different issue). 

Innovation Minister François-Philippe Champagne struck a slightly different note, saying Canada has moved from being just a good neighbour to the United States to being “the strategic partner that they need.”  

Whether Canada has actually done that is highly debatable, but in concept it’s close to the “matter more” approach to dealing with the U.S. advocated in the PPF’s recent report on how to manage this country’s most vital relationship. 

Despite the government’s attempt to put a positive gloss on Trump’s re-election, most independent analysts are much more sombre about the challenges he will present to Canada. It i’s clear Trump will be returning to the White House in an aggressive mood. On the day before the vote, he threatened to impose tariffs of 25 per cent or even 100 percent on imports from Mexico if that country doesn’t stem the tide of migrants and drugs coming over the U.S. southern border.  

Added to Trump’s complaints about Chinese imports coming through Mexico, ithis recent comments suggests that country will be more in his cross-hairscrosshairs than will Canada. 

Trump’s clear victory, giving him what he called an “unprecedented and powerful mandate,” will surely strengthen his determination to pursue his America First approach. As former U.S. ambassador to Canada Kelly Craft told a PPF audience a few days before the election, it’s time to “buckle up.” 

‘The most beautiful word’ 

Trump doesn’t just advocate across-the-board tariffs on all imports, he’s made tariffs the cornerstone of his economic policy and a potential source of important new revenue for the U.S. government. Tariff, he says, “is the most beautiful word in the dictionary.” 

A 10-percent tariff on all Canadian imports into the U.S. would hit this country hard. TD Economics estimates it would reduce GDP by as much as 2.4 percent in the first two years if Canada responded in kind.  

An impact of that magnitude means Trump’s victory is “overwhelmingly negative” for Canada, according to Ian Lee of the Sprott School of Business at Carleton University. 

Jimmy Jean, chief economist at Desjardins financial group, agrees there’s “not a lot of good news” in Trump’s re-election. Jean told CBC News that if Trump does go ahead with tariffs on Canadian imports, key sectors like autos, manufacturing and energy “would be hurt pretty sharply.” And if Trump uses the threat of tariffs as a lever to extract concessions on the USMCA, he said, “negotiations will be more difficult this time around.” The bottom line is that Canada would “be at risk of something resembling a recession under a Trump administration.” 

Another effect of Trump’s policies will be to put downward pressure on the Canadian dollar. Trump promises to lower corporate taxes and pursue more aggressive deregulation. He also wants to lower oil prices, hurting Canada’s terms of trade with the U.S.  

PPF Fellow Brett House, a professor of professional practice at Columbia Business School and fellow at U of T’s Munk School, adds this: “New, increased and broader tariffs on trans-border trade with the U.S. are clearly the most immediate and substantial economic concern for Canada under a new Trump administration. The threat of Trump’s promised tariffs goes beyond the friction they could introduce into North American trade: their prospect is already putting a chilling effect on investment in Canada that dents our efforts to address our longstanding productivity concerns. 

Additionally, Trump promised a combination of substantial spending initiatives and reduced taxes that could threaten the competitiveness of Canadian industry and expand fiscal deficits in the U.S. and Canada as our governments try to match moves by Washington. 

The combined effect of tariffs and higher deficits in the U.S. is likely to be inflationary and reduce the scope for the Fed to cut policy interest rates much further. This could be good news for the loonie. With interest rates higher than they’d otherwise be in the U.S., the U.S. dollar is likely to remain strong, which could mitigate some of the damage inflicted on Canadian exporters by Trump’s policy initiatives. 

Finally, the scheduled review of the CUSMA, due for 2026, will now take on higher importance with a less certain outcome. Dealing with this and responding to the Trump White House’s policy changes will be a major distraction from domestic concerns for Canadian policy makers.” 

READ MORE: What Donald Trump’s victory means for Canada’s economy 

Stepping up on defence 

Long before Trump’s victory, the U.S. was pressing Canada to step up on defence. The key demand is that this country meet its NATO commitment to spend 2 percent of GDP on defence more quickly than the Trudeau government’s goal of 2032. Trump has made it clear he wants all U.S. allies to spend more on defence, so that pressure can be expected to increase. 

Questions are being raised about Canada’s NATO commitment following a report last week from the Parliamentary Budget Officer. The PBO looked at the numbers and concluded the current plan to get to 1.76 percent spending on defence by 2030 doesn’t add up.  

The PBO analysis calls into question the figures on economic growth underlying the defence department’s plan. If more accurate assumptions are used, defence spending would get to only 1.58 percent of GDP by the end of this decade (from 1.3 percent now). That would make achieving the 2-percent goal by 2032 virtually impossible. 

 According to the PBO, the government would have to almost double defence spending to $81.9 billion per year to achieve the NATO target. Americans from both parties have expressed frustration with Canada’s lagging defence spending and have linked that to the overall relationship. Failure to get to 2 percent more quickly, in other words, could undermine Canada’s vital trade partnership with the U.S. if the Americans conclude that this country is not a reliable ally. 

A further sign on that front: a new analysis published by the conservative Heritage Foundation in Washington declares that “NATO has a Canada problem.” The report by analyst Wilson Beaver says Canada is “perfectly capable” of doing more on defence and should focus more on defending North America, and the Arctic in particular. given incursions by Russia and China into the far north. 

Mike Blanchfield, PPF’s Director, Energy Policy and Global Security, adds these thoughts on defence, critical minerals and Trump’s threat to deport illegal migrants: “The time has come for the government to meet the NATO 2 percent spending requirement. The Trump administration won’t tolerate any more stalling or vague commitments. The Fall Economic Statement would be a good place to stake out some firm ground on that. 

As for critical minerals, it’s time for Canada to show a plan on how it can efficiently get them out of the ground in much greater volume. The government needs to come to Trump with its own vision for how it can make that happen; otherwise we run the risk of the U.S. imposing its own vision on us. Republicans recognize how vital these critical minerals are to advanced military hardware and the technology that powers AI and quantum computing. It’s a security issue. There’s a strong competition with China on critical minerals. It is in Canada’s interest to be a useful ally to the Americans in that race. 

Trump’s promise of mass deportations has serious implications for Canada. In the short term, the government has to be mindful of the possibility of more illegal border crossings as some Americans decide they don’t feel welcome and want to take drastic steps to leave sooner. We saw this happen already during the first Trump presidency. In the longer term, we need a plan on how we’re going to manage the continental implications of large numbers of people potentially being forced out of the United States.” 

Canada also needs to play its multilateral cards carefully in the coming year, especially in light of its G7 presidency. It needs to do everything it can to bolster the very international institutions that Trump derides. Canada needs these club memberships more than ever. It can’t afford to be alone on the international stage. At the same time it must stay close to the United States and tread carefully and tactfully in how it does this.” 

READ MORE: What the wonks are saying about Trump’s victory 

Radar for the north 

It appears Canada is stepping up plans to do something concrete to contribute to the security of the far north. David Pugliese of The Ottawa Citizen reports that defence industry representatives in Ottawa were briefed on plans for a new $6-billion radar system that may reassure the United States that Canada is doing more to defend North America. 

The planned system is called Polar-Over-the-Horizon Radar. It will be “optimized to detect missiles” but will also be able to track other aerospace and maritime objects. NORAD has expressed concern about defending against cruise missiles coming over the polar region. 

The radar system was announced in 2022, but Pugliese says few details were provided. The system is expected to be operational by 2033 but large, costly defence projects have a track record of falling behind schedule. This one appears to be the kind of system that could calm U.S. concerns that Canada is not contributing to joint U.S.-Canada defence. 

— By Andrew Phillips 

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