Canada’s Complicated Tango with the U.S.by Drew Fagan
Almost 50 years ago, on a Friday the 13th, a U.S. president known for capriciousness hatched a strategy that would strike a blow to the post-war institutions that had helped engender a quarter-century of peace and prosperity.
Richard Nixon announced the measures in August, 1971, without advance notice, including to Canada. The steps—which effectively ended the Bretton Woods system of fixed exchange rates and added a 10 percent tariff on foreign imports to the U.S.—were to boost a weak economy, afflicted with high unemployment and rising inflation. But they left U.S allies aghast.
Canadian appeals fell flat and led to a Canadian policy response known as the Third Option. This policy should receive new scrutiny as Canada again grapples with a capricious U.S. president whose America First sloganeering has spawned unprecedented uncertainty.
The Third Option strategy was announced in 1972 by the government of Pierre Trudeau and called for reduced U.S. economic and cultural influence.
The status quo had been rejected (Option 1); so too Option 2 (closer ties with the U.S.). A third option was therefore pursued to “reduce the present Canadian vulnerability” through trade diversification and by strengthening a distinct Canadian economy. The goal was to create “counterweights,” without being anti-American.
History records the results. About 60 percent of Canada’s trade then was with the United States. Although Canada signed a “contractual link” with the European Economic Community, trade with Europe remained limited. When the Liberal government was defeated in 1984, exports to the United States were at about 75 percent. Meanwhile, domestic policies such as the establishment of the Foreign Investment Review Agency and later the launch of the National Energy Program were viewed in Washington as anti-American. The Progressive Conservative government of Brian Mulroney moved to the second option—free trade. Exports to the United States in 2020 remain at about 75 percent today, but in an economy that is much more trade-oriented than decades ago.
Today, Canada confronts a United States even more challenging. Stark divisions in American society have been made worse by the COVID-19 crisis. A political system that once engendered bipartisanship stokes extremism, especially from the Republican Party. A sense of grievance about allies has been brought to a boil by U.S. President Donald Trump, and is likely to remain—at least in some policies—when he leaves office. Even after ratification of CUSMA, which replaced the North American Free Trade Agreement, Washington briefly reimposed tariffs on Canadian aluminum on the grounds—seldom employed before the Trump era—that U.S. national security is at stake.
A mean and self-absorbed United States seemingly leaves less policy space for a nation like Canada. What to do, especially as a presidential election that might be the most consequential in memory draws near?
As a start, Ottawa is determined not to be caught flat-footed as in 2016, when Trump won power. The Liberal government wasn’t alone; governments around the world scrambled to reach out to those within Trump’s orbit. Now, scenario-planning is well underway, as is outreach to key players in both the Republican and Democratic campaigns.
It’s usually the incumbent who’s the known quantity. But Trump’s seemingly infinite capacity for reactionary politics—which is to say, in reaction to slights real and perceived as well as in appeals to extremism—makes planning for a second Trump term especially difficult.
By contrast, Democratic presidential nominee Joe Biden is as familiar a player as there is in Washington, having been first elected to the Senate in 1972. As he said on an Ottawa visit in late 2016, as his time as vice-president wound down, he didn’t just work with Justin Trudeau, he worked with Pierre Trudeau.
The nightmare scenario for Canada, at least immediately, relates to the voting process itself and the potential for a November 3 election to yield no accepted outcome.
The situation is characterized as “combustible” by Canadian officials. It’s not hard to envisage violence before, during or after the vote, especially given the partisan tension, the circumstances of casting ballots during a pandemic, the protests over racial inequality organized by the Black Lives Matter movement and the counter-protests.
This could lead to additional economic uncertainty in the United States, already facing the worst downturn since the Depression, which would batter Canada’s economic prospects and, in extreme circumstances, could lead to a renewed flow of asylum-seekers at Canada’s borders. Canada’s core economic premise relates to Canadian stability in a stable North American economic space. That would be further disrupted.
Canadians watched on U.S. election night in 2000 as balloting proved inconclusive. It took five weeks for the Supreme Court to effectively end the Florida recount with George W. Bush leading Al Gore by 537 votes. Gore disagreed with the ruling, but conceded. President Bill Clinton stayed out of the fray. (Canada received some attention as a counter-point, because of a federal election days before where the ballots, as always, had taken just a few hours to tabulate.)
Trump has pointedly refused to say if he would concede the election in similar circumstances and his efforts to delegitimize mail-in voting have heightened tensions. Almost one-quarter of ballots were cast this way in 2016 with a higher percentage expected this year, especially among visible minorities and the poor. Imagine a scenario in which Trump is ahead on election night, based largely on ballots cast at polling booths, but that mail-in ballots take many days to count because of U.S. Post Office delays and eventually put Biden over the top. It’s unlikely that Trump would be as magnanimous as Gore or as detached as Clinton.
If the worst scenario is election mayhem, or something approaching it, the likely downside scenario relates to a second Trump term. This outcome isn’t entirely negative. Trump did sign CUSMA after much smearing of Canada for sharp trading practices and security free-riding, and bilateral trade did grow on Trump’s watch, at least until the pandemic hit.
He’s been forthright in his support of the Keystone pipeline, while Biden opposes it. And Trump’s immigration restrictions, particularly regarding visas in the technology sector, have been a boon to Canada as global talent looks north.
But a Trump victory likely would prolong the pandemic given his refusal to marshal the full power of the U.S. government. Canadian policymakers describe the Canada-U.S. border as not so much closed—closed to most travellers anyway, if not trade—as “fit for purpose.” But it’s still corrosive that the “longest undefended border in the world” is anything but open. Any circumstance in which this situation comes to be seen as normal would weigh hugely on a country that is more dependent on one market than any other major industrialized country and where about 90 percent of residents live within 150 kilometres of the border.
The likely upside scenario relates to a Biden victory, but it is hardly a panacea. Unlike Trump, who seems to view geopolitics through the lens of zero-sum transactions, Biden spent a career in Washington fashioning bipartisan consensus. He will, similarly, take much uncertainty out of the bilateral relationship. But U.S. domestic considerations have seldom been more powerful when up against international interests, including Canada’s.
Biden’s $400-billion (U.S.) “Buy American” procurement policy would prove a challenge for Canadian industry. His commitment to industrial policy is not unlike that of the Liberal government, but the scale of planned R&D investment—$300-billion on 5G, artificial intelligence and other cutting-edge sectors—would be a competitive challenge for Canada.
Job one for Ottawa with a Biden administration: ensure that his “build back better” plan has more continental perspective, even if the dominant frame of mind is U.S.-centric. Times have changed over a decade, but a similar Obama-era procurement plan ended up with a bigger Canadian component when provinces and territories opened their own markets in ways similar to most U.S. states.
The Third Option paper was entitled “Canada-U.S. Relations: Options for the Future.” It framed the choice as U.S. integration versus activist domestic policy and closer ties with other countries.
But it need not be a choice.
Diversification of Canada’s trade and investment linkages should not aim to reduce dependence on the U.S. market. It should mean taking greater advantage of other markets while still being opportunistic about the United States.
Canada doesn’t have the luxury of a Plan B. It has only a Plan A that mixes effective domestic policy with realistic approaches to Canada-U.S. and international policies more fit for an era of U.S. retrenchment and global change. To wit:
Canada’s productivity record in recent years has trailed significantly the average performance of industrialized countries in the OECD and has trailed the United States by an even larger margin. Three decades ago, Canada’s economy was almost exactly one 10th the size of the United States. It is now less than one 12th, at 8.1 percent. Ontario, which remains Canada’s industrial heartland, had a GDP per capita equal to seven nearby U.S. states 40 years ago, but now trails them all—Michigan by a small amount, Ohio and Pennsylvania by more. New York’s GDP per capita is as much as two-thirds higher.
Meanwhile, Canada’s interprovincial trade pales compared to Canada-U.S. trade. The former has been held back by interprovincial trade barriers that, according to a 2019 Statistics Canada study, were the equivalent of a 10 percent tariff. The IMF has estimated that genuine interprovincial free trade would increase Canada’s GDP by 4 percent.
As the Third Option noted all those years ago, there’s no substitute for a strong Canadian economy in terms of building international capacity and credibility, and a strong Canadian economy is in the interests of the U.S.
A paper on Canada and a changing United States isn’t the place for a detailed analysis of domestic affairs, but one important policy lever does deserve to be highlighted: infrastructure.
The federal government’s $187-billion infrastructure plan has a clear and likely growing focus on resilient and sustainable infrastructure. Meanwhile, there are few sectors as balkanized in Canada as clean-energy transmission. A national prioritization of east-west grids would fit Ottawa’s green agenda and be the kind of nation-building—like the CPR or the St. Lawrence Seaway—that would boost the domestic economy.  It also would likely be met with plaudits in Washington in the early days of a Biden administration, as the United States navigates its way back into Paris Accord compliance.
Ottawa’s infrastructure plan also has a significant international trade and transportation focus. The construction of the Gordie Howe International Bridge between Detroit and Windsor is the most high-profile example, for which Canada is footing the bill. The Trump administration largely failed to enact an infrastructure plan. But any post-pandemic U.S. economic strategy is likely to have a robust infrastructure component, including broadband development. It’s also likely, again, to include a heavy domestic procurement orientation.
Infrastructure expenditures on both sides of the border will grow in the years ahead as both countries make up for decades of under-investment. Canada has an advantage in expertise, especially with regard to public-private partnerships, and should try to leverage this to keep a strong foothold in the increasingly protectionist U.S. market.
The Third Option was announced when the United States represented a little more than one-third of global GDP. It’s now less than one-quarter. Still, Canada benefits from having a big part of the world on its doorstep and often seems to take it for granted. As one senior Canadian official put it recently, “we sometimes seem to think our geographic advantage was achieved through good government policy.”
Canada is the largest trading partner of New York state, for example, which has a GDP equal to Australia; the same is true for, say, Colorado, which has an economy equal in size to Singapore.
Canada’s bilateral trading relationship with the U.S., even in the wake of CUSMA ratification, remains largely as it has been for more than 30 years. The U.S. imposes tariffs on politically sensitive products—aluminum recently, softwood repeatedly—but the vast majority of trade continues without hindrance. In the early years of free trade, the key growth was in auto and auto parts. Later, it was in oil and gas. Now, it is in services.
More broadly, it is critical that Canada maintain the all-hands-on-deck strategy organized for the CUSMA negotiations. It involved multiple federal departments, provincial and territorial governments, municipal leaders (given growing cross-border ties regarding urban policy), business organizations and unions to ensure U.S. attention to bilateral interests.
If anything, CUSMA might even help. The more stringent rules-of-origin that the U.S. insisted upon weren’t aimed at freezing out Canada and Mexico, U.S. Trade Representative Robert Lighthizer insisted in a recent article in Foreign Affairs, but to keep out free-riders. “They [new CUSMA rules] will ensure that the benefits of the agreement will flow principally to Canada, Mexico and the United States, not to other countries that have not provided reciprocal market access.”
As the pandemic forges regional trade re-alignment focused on supply chains, Canada can potentially be a key part of North American “reshoring” and work with the United States on common approaches in such sensitive sectors as medical equipment, and the Internet and cybersecurity.
CUSMA does include much unfinished business. The same Statscan study referenced earlier pegged continued non-tariff barriers at the Canada-U.S. border—“divergent regulations, red tape, border-related delivery delays and policy uncertainty”—as adding up to the equivalent of a 30 percent tariff. This remains a tremendous drag on continental trade.
Canada has worked on this “under the radar” regulatory and trade facilitation agenda for years, with mixed results. It must continue looking for opportunities in sectors of keen interest to U.S. interlocutors. This builds on what remains a remarkable architecture of bilateral ties—national, sub-national, sectoral, regional—that still does much to take the sting out of recent rhetorical excesses. These institutional connections—the kind of thing President Trump has characterized in other contexts as the “deep state”—began with the International Joint Commission in 1909 and have spread like spider webs over the decades.
This includes defence. Canada has an opportunity to highlight military ties as a mandated review of NORAD draws near. Mutual defence and security might be characterized, as another Canadian official said recently, as the “great, silent foundation” of the bilateral relationship. A similar opportunity may lie in the Arctic, which is drawing increased U.S. attention as a 21st-century “great game” develops involving Russia and China.
The bilateral relationship also needs more non-military boots on the ground. The Canada-wide lobbying campaign during the NAFTA re-negotiation was known informally as the “donut strategy,” with the Trump White House and its insults as the hole and the 50 states beyond the Beltway as the cake. While it worked, it also underscored that Canada’s diplomatic corps is under-resourced in the U.S.
After the terrorist attacks of 2001, Ottawa launched an “enhanced representation initiative,” to redouble its U.S. focus amid concerns then about a thickening border. But the additional resources dried up not that many years later.
Canada’s representation should not stand in sharp contrast with a country such as Mexico, which has about three times as many consulates in the U.S. as does Canada; granted the huge number of Mexicans in the country means greater consular challenges. Canada is the only country privileged to have its embassy situated between Capitol Hill and the White House. Its footprint outside Washington should be equally notable.
The number of countries that claim a special relationship with the United States stretches the meaning of the word special. The Philippines has done so, as have France and Australia. The phrase is most often associated with the close relations between the United States and Great Britain dating to the Second World War.
Canada has had good reason to claim a special relationship with Washington, though Richard Nixon—him again—was in no mood to entertain any such conceits in a visit to Ottawa in 1972: “It is time for us to recognize that we have very separate identities; that we have very significant differences …”
Today, given the experience of recent years, the idea that Canada maintains a special relationship with Washington—or that any country does—seems like wishful thinking, or simply naïve.
Much of the American global outlook will turn on the election, but some degree of America First appears to be here to stay. As voting day draws near, Canada’s best international approach might be characterized as a focus on other markets, other friends and perhaps, other efforts to help the United States re-engage.
Other markets: A decade ago, Canada lagged most industrialized countries in terms of free-trade linkages. Back then, it had NAFTA, of course, and also deals with Israel, Chile and Costa Rica. An agreement with Singapore proved elusive because Ottawa insisted on matching the favourable deal Washington obtained.
The efforts of the Harper and Trudeau governments transformed Canada’s trade ties with the signing of the Canada-European Union pact and the CPTPP agreement involving Canada and 10 other Asia-Pacific countries (including Singapore, but not the United States).
CUSMA borrowed technical language from the CPTPP, but there is little chance that a Biden administration would seek to revive U.S. membership. Hostility to free trade is as close as Washington comes at the moment to a consensus issue; that and growing hostility to China. Even free trade with Europe, which was first bruited by Washington and Brussels 25 years ago, is a bridge too far.
At home, the private sector must be up to the task of meeting the opportunity. The Trade Commissioner Service and Export Development Canada have done much to build 21st-century trade and investment promotion tools. But the statistics of recent years regarding Canadian trade with Europe and Asia are mixed and the pandemic’s encouragement of regionalism over globalization may prove problematic. Still, Canada needs to remain focused on trade abroad.
Other friends: The unilateralist approach that Trump pursued in his first term would likely continue in his second. And it would force Canada to think more deeply about who its friends are, especially at a time when, arguably, Canada’s relations sit at an historic low with the world’s four major powers: not just an America intent on retrenchment, but also a revanchist Russia, a bellicose India and a globally assertive China.
Both the Liberal government and the Conservative opposition have spoken positively of steps to build a coalition of like-minded supporters of the challenged global system; not just multilateralism per se but countries that specifically embrace democracy, human rights and open societies.
The Alliance for Multilateralism was formed 18 months ago, building on an initiative launched by Germany, France, Japan and Canada. The COVID crisis is ready-made for such an alliance, given the need for collaboration, including in terms of the critical role played by global health organizations such as the World Health Organization. Indeed, 24 like-minded countries signed a joint statement last spring likening the crisis to a “wake-up call for multilateralism.”
More can be done with this growing coalition. It could encourage investment flows and fair elections as protectionism and populism rises, immigration as borders close and focus on the threat of climate change, which has receded in public consciousness amid the pandemic. Canada has been leading roughly similar efforts regarding the World Trade Organization. It’s not enough to stem the tide of illiberalism, but it helps.
Other U.S. efforts: A U.S. sensibility now seems close to hard-wired that American leadership has proven to be too high a price to pay for the kind of benefit it’s had, as if Washington alone led and no one shared the burden.
But a Biden presidency would undo at least some of the excesses of the Trump era, including re-engagement on global warming. International trade may have become a third rail, with the exception of CUSMA, but a renewed focus on arms control should not be, nor should a more productive stance on the collective responsibilities of NATO. Global co-ordination on the pandemic, including a responsible position regarding the WHO, would be an early dividend of a Biden victory.
Over the decades, Canada’s multilateral commitment has come to be seen as a way to limit U.S. influence over Canada. But that’s not how things started. Canada was concerned primarily, after the U.S. entry into the Second World War, that the U.S. might go home again upon victory. U.S. isolationism had been a dominant strain of American policy for a generation, beginning with the decision not to join the League of Nations and continuing until Pearl Harbor.
Canada’s national interest lies in collective security, which could only be achieved through engaged American leadership. These were the early years of Canadian diplomacy. Canada helped Washington create the post-war institutions—the United Nations, the World Bank, the International Monetary Fund, NATO—that seem under threat as the United States again questions its global role.
The situation now is different than then, of course. But Canada’s multilateral vocation could be deployed once again to encourage a post-election America, depending on the results, to be a responsible leader in a more complicated and dangerous global environment.
“Developing our own distinctive international outlook while managing our all-pervasive bilateral relationship with the U.S. are but two dimensions of a single preoccupation that has dominated our existence for half a century,” said Allan Gotlieb in 1991, shortly after he’d completed his eight-year posting as Canada’s ambassador to Washington. “Our overriding national preoccupation has been about how to limit U.S. power over our national destiny while deriving maximum advantage from our propinquity.”
We were, Gotlieb said then, in an era of discontinuity with the end of the Cold War. We are perhaps at another such turning point; not the so-called “end of history” of 1991 but the apparent return of the jungle. Canada can only do so much to protect its interests in such challenging circumstances, but it must do what it can, especially south of the border.
- Canadian exports and imports of goods and services represented about 65 percent of GDP in 2019, according to the World Bank, as opposed to about 50 percent in 1989, when free-trade went into effect. The figure actually peaked in 2000, after a decade of double-digit growth in Canada-U.S. trade, at 83 percent. The equivalent figure for the United States in 2019 was 27.5 percent. About 18 percent of U.S. exports were sold to Canada in 2019. ↑
- U.S. political scientists Norm Ornstein and Thomas Mann refer to this phenomenon as “asymmetric polarization” — that is, while the Democratic Party has become more left-leaning, the Republican Party’s march to the right has been more pronounced. ↑
- As one significant example of what’s changed, the Group of Seven industrialized countries was proposed on Nixon’s watch at the time of the 1973 oil crisis, although it only became seven members in 1976 when Canada joined, largely at the behest of the United States. The G7 has been criticized as outmoded, given the rise of China and other global players. But it does provide an important strategic opportunity for leading democratic countries to co-ordinate and has been a core source of prestige and influence for Canada. The 2020 summit was scheduled for June but postponed by the host country, the U.S. It now is unlikely to be held at all.”
- The most pertinent comparison might not be to the 2000 election, but to the 1876 election. Then, a tight vote and the lack of a clear winner in the electoral college forced a divided Congress — as Congress is now — to decide. The election result turned on a political deal. Republican Rutherford B. Hayes took office and Democrat Samuel Tilden conceded, but, in return, the Republicans pulled federal troops out of the south, where they’d been stationed since the end of the Civil War. This marked the beginnings of Jim Crow; segregation and other forms of discrimination, including voting restrictions, that subjugated African-Americans through to the advances of the modern civil rights movement. ↑
- See more on this issue here: https://www.cdhowe.org/intelligence-memos/jon-johnson-%E2%80%93-buy-american-and-economic-relations-canada ↑
- The paper by Secretary of State for External Affairs Mitchell Sharp appeared in International Perspectives, which was then a journal of the Department of External Affairs. ↑
- According to World Bank data, Canada’s GDP grew faster than U.S. GDP 16 times in the past 30 years (1990 to 2019). However, over the same period, the U.S. economy grew to $21.374-trillion from $5.963-trillion, for an increase of 258 percent. Canada, meanwhile, grew to $1.736-trillion from $593.93-billion, for an increase of 192 percent. See https://data.worldbank.org/country/united-states and https://data.worldbank.org/country/canada ↑
- The calculations come from a forthcoming paper on Ontario growth prospects and strategy by Ontario360, a public policy initiative housed at the Munk School of Global Affairs and Public Policy at the University of Toronto. ↑
- The IMF paper notes that interprovincial trade and international trade were roughly equal in the early 1980s. Now, international trade stands at about 65 percent of GDP while interprovincial trade stands at about 40 percent. (Interprovincial trade in services, however, does outstrip international services trade.) https://www.imf.org/en/Publications/WP/Issues/2019/07/22/Internal-Trade-in-Canada-Case-for-Liberalization-47100 ↑
- See https://ppforum.ca/publications/fix-the-grid-clean-electricity/ ↑
Consulting Partner: Deloitte
Federal Government Partner: Government of Canada
Provincial Government Partners:
Foundation Partners: Metcalf Foundation
PPF would like to acknowledge that the views and opinions expressed in this article are those of the author(s) and do not necessarily reflect those of the project’s partners.