What to do about Trump’s big new tariff threat
Canadian governments scrambled this week in the wake of Donald Trump’s surprise threat to impose tariffs of 25 percent on imports from Canada and Mexico on Jan. 20, his first day back in the White House.
The premiers demanded a meeting with Prime Minister Justin Trudeau, and on Wednesday evening the first ministers got together virtually to decide how to respond.
The federal government says a “Team Canada” approach is needed, given the seriousness of Trump’s threat. The incoming president said he will impose the tariffs until Canada and Mexico stem the flow of migrants and drugs, in particular fentanyl, across their borders with the United States. “Both Mexico and Canada have the absolute right and power to easily solve this long-simmering problem,” Trump wrote. “It is time for them to pay a very big price!”
Economists are using words like “catastrophic” to describe the potential impact on Canada, since the U.S. accounts for about 75 percent of all Canadian exports. PPF Fellow and University of Calgary professor Trevor Tombe, who studied the impact of tariffs for a recent report for the Canadian Chamber of Commerce, said on X that with a 25 percent tariff “the Canadian economy would take a 2.6 percent real GDP hit (annually) or $2,000 per person. Next year will be #cdnecon recession.”
But it’s far from clear that Trudeau will be able to forge the kind of Team Canada united front against Trump that his government did when the president forced a renegotiation of the North American trade agreement in 2018.
Some premiers, notably Doug Ford in Ontario and Danielle Smith in Alberta, have spoken out on their own provinces’ priorities, suggesting Canada should negotiate a bilateral deal with the U.S. that excludes Mexico. Both premiers said this week that Trump has a point about lax security at the Canadian border and Canada should respond to his concerns.
At the same time, Conservative Leader Pierre Poilievre blamed Trudeau for leaving Canada vulnerable to threats like Trump’s. He said Trump’s statement is “unjustified” but said the Liberal government has failed to secure the border and has weakened Canada’s military.
Many pointed out it makes little sense for Trump to lump Mexico and Canada together on migration and illegal drugs. The number of people intercepted while trying to enter the U.S. from Canada has increased 10-fold in the past three years, to 23,721 in the year ending Sept. 1. But that pales beside the 1.53 million on the southern border. Similarly, U.S. customs agents seized 43 pounds of fentanyl at the Canadian border last year, compared to 21,100 at the Mexican border. “Canada is no Mexico,” said Ford.
PPF Fellow Steve Verheul, a former chief trade negotiator for Canada who led the renegotiation of NAFTA four years ago, adds these thoughts: “Donald Trump’s vow to impose 25-percent tariffs against Canada and Mexico is certainly a bargaining ploy, but given the extreme nature of the threat its intent is more to provoke than negotiate. Aside from being a blatant breach of various provisions of CUSMA and the WTO, the imposition of such tariffs would leave the two largest trading partners of the U.S. facing higher tariffs into the U.S. market than virtually any other country in the world, other than Russia and North Korea. And this in a North American market that is highly integrated with extensive supply chains across the three countries.
In Canada’s case, the magnitude of the threat is hardly proportional to the stated rationale. Although further action is needed on drugs like fentanyl and illegal aliens entering the U.S. from Canada, Canada is far from the biggest threat to the U.S. on these issues and linking these issues to a potential economic action of a scale that hasn’t been seen in generations makes little sense. More than $3.5 billion of goods and services cross the Canada-U.S. border every day. Canada is the principal source of U.S. imported energy, including oil, natural gas, electricity and uranium. Canada also supplies inputs to the U.S. for all kinds of further manufacturing, from consumer goods to metal products to pulp and paper to food, and many others. This kind of tariff action would cause significant harm to Canada and Mexico, but it would also be a significant blow to U.S. interests.
Canada has time to further develop its strategy and response. There will be pushback to the threat from within the U.S., and with Trump not taking office until Jan. 20 there is time to try to dissuade the U.S. from going down this path. Part of Canada’s strategy had been to align more closely with the U.S. on common challenges to the North American market and to focus on areas where we could work more closely together. In light of Trump’s threat, it may be time to re-think some parts of that approach.”
— By Andrew Phillips
This article first appeared in PPF’s Canada-U.S. newsletter. Read more here and subscribe now to get new editions in your inbox every Wednesday morning.