Navigating the Tariff Threat: Canada’s Approach to the Trump Administration’s Trade Posture
Former Canadian Ambassador to the United States, Frank McKenna, expressed confidence that Canada could mitigate the most severe impacts of potential tariff threats from the Trump administration, while acknowledging that some economic repercussions would be unavoidable. McKenna, currently serving as deputy chair at TD Securities, posited that the incoming president’s primary objective was to utilize tariff revenues to finance tax reductions within the United States. He viewed the proposed 25% tariff as a strategic bargaining tactic rather than a concrete policy, designed to exert pressure ahead of the inauguration. McKenna argued that implementing such a substantial tariff on Canadian and Mexican goods would likely trigger inflation and strengthen the US dollar, counteracting the administration’s economic goals. He predicted that a more realistic outcome might involve temporary tariffs, perhaps around 10%, until a mutually acceptable resolution could be negotiated, rather than the full 25% upon Trump taking office.
The implications of enacting the threatened tariffs were significant, with daily cross-border trade between Canada and the United States exceeding $3.5 billion in goods and services. Government officials, provincial premiers, and trade organizations concurred that such measures would inflict substantial damage on both economies. Greg Husisian, an international trade lawyer, emphasized the interconnectedness of the two nations’ economies, arguing that any significant tariff increases would inevitably harm businesses on both sides of the border.
To avert the worst-case scenario, McKenna advocated for a dual approach involving public diplomacy and private negotiations, the latter already underway. He expressed optimism about the potential for reaching an agreement despite the public rhetoric, citing a reportedly positive personal relationship between Prime Minister Trudeau and President-elect Trump. McKenna also advised Canadian officials to refrain from echoing Trump’s narratives, particularly regarding border issues like drug trafficking and migration. He cautioned against amplifying these claims, which could inadvertently lend credence to the administration’s arguments.
A recurring theme in Trump’s rhetoric was the assertion that the US "subsidizes" Canada’s economy. However, trade experts clarified that the actual situation is a US trade deficit with Canada. Husizian explained that Trump’s view of trade imbalances as analogous to corporate profits and losses overlooked the fundamental exchange of goods for money. He drew a parallel with consumer purchases, noting that spending money at a retailer doesn’t constitute subsidizing the retailer, but rather an exchange for goods.
Should negotiations fail to yield a satisfactory outcome, McKenna acknowledged that Canada would be compelled to respond with retaliatory tariffs. However, he maintained hope that the US would adhere to the terms of the United States-Mexico-Canada Agreement (USMCA), which Trump himself had negotiated during his first term. McKenna emphasized that the agreement explicitly prohibited such tariff actions, placing Canada on firm legal ground. He argued that implementing the tariffs would constitute a breach of the USMCA by the United States.
While Husisian concurred that a 25% tariff would represent a clear violation of the agreement, he expressed skepticism about whether this would deter the Trump administration. He suggested that the president might be willing to disregard existing rules and leverage the upcoming USMCA review to exert further pressure on Canada. This first joint review, scheduled for July 1, 2026, introduced a further complication. Any tariff violations under the current agreement might become moot by the time legal challenges made their way through the courts, given the potential for revisions or renegotiations during the review process.
Canada’s Balancing Act: Diplomacy, Retaliation, and the USMCA
Canada faced a complex challenge in navigating the trade relationship with the incoming Trump administration. The threat of tariffs loomed large, potentially disrupting the substantial cross-border trade between the two countries. While optimism existed that a negotiated solution could be reached, the potential for a trade conflict was undeniable.
McKenna’s insights as a former ambassador provided a nuanced perspective on the situation. He understood the political dynamics at play and emphasized the importance of strategic engagement. His recommendations encompassed a combination of diplomatic efforts and a preparedness to retaliate if necessary.
The USMCA, while offering a framework for trade relations, also presented potential pitfalls. The impending review process introduced uncertainty, raising questions about the enforceability of existing provisions. This legal ambiguity further complicated Canada’s strategic planning, as the timeline for legal challenges might extend beyond the review period.
The Trump Administration’s Trade Philosophy: A Focus on Deficits
President-elect Trump’s focus on trade deficits as a metric of economic success shaped his approach to international trade agreements. His tendency to view trade imbalances as akin to corporate losses influenced his perception of the relationship with Canada. This perspective, however, often overlooked the complexities of international trade and the mutual benefits derived from the exchange of goods and services.
The idea of the US "subsidizing" Canada’s economy, a frequent refrain in Trump’s rhetoric, misrepresented the reality of the trade relationship. Experts pointed out that the actual situation was a US trade deficit with Canada, reflecting the flow of goods and services between the two countries. This misunderstanding highlighted the challenge of bridging the gap between political rhetoric and economic realities.
Canada’s Strategic Response: Diplomacy and Preparedness
Canada’s approach to the potential trade conflict necessitated a delicate balancing act. Diplomatic engagement aimed at reaching a mutually beneficial agreement remained the preferred course of action. However, the possibility of retaliatory tariffs had to be considered if negotiations proved unsuccessful.
McKenna’s advice to avoid amplifying Trump’s narratives reflected a strategic awareness of the potential pitfalls of escalating rhetoric. Engaging in public disputes could exacerbate tensions and complicate the negotiation process. A measured and diplomatic approach, while challenging in the face of provocative statements, served as the best strategy for achieving a positive outcome.
The USMCA: A Framework Under Scrutiny
The USMCA, intended to govern trade relations between the US, Canada, and Mexico, found itself under scrutiny from the outset. The upcoming review process introduced an element of uncertainty, raising questions about the long-term stability of the agreement. This ambiguity added another layer of complexity to Canada’s strategic considerations.
The potential for changes to the USMCA during the review process meant that any violations of existing provisions might become moot by the time legal challenges reached a conclusion. This legal grey area presented a challenge for both Canada and the US, as it undermined the predictability and enforceability of the agreement.
Conclusion: Navigating Uncertain Terrain
Canada’s trade relationship with the US under the Trump administration entered a period of uncertainty. The threat of tariffs, coupled with the upcoming USMCA review, created a complex landscape for policymakers. A strategic approach that combined diplomatic efforts with a preparedness to retaliate was crucial for navigating this challenging terrain. The ultimate outcome depended on the ability of both countries to find common ground and uphold the principles of fair and mutually beneficial trade.
