Canada can beat Trump’s tariffs by waiting them out
Summary
Rather than escalate the trade war, Ottawa should let U.S. prices increase until Americans revolt.
It’s natural for Canada to respond to the barrage of U.S. tariffs by threatening retaliation. But an escalating trade war plays into President Trump’s hands and risks higher inflationary pressures in both countries. A better strategy is to let tariffs raise prices until American consumers and producers pressure Mr. Trump to reverse the damage.
There’s a myth floating around that Canada doesn’t really need the U.S., and that the answer to Mr. Trump’s aggression is simply to diversify Canada’s export market. This isn’t true. Yes, Canada should use the disruption of trade with the U.S. to diversify some exports to other countries. Limiting oil and gas exports to the U.S. would depress Canada’s export prices and cost tens of billions of dollars in lost revenue, and Canada’s ability to sell oil and gas in overseas markets has been severely restricted by its cancellation of major pipeline projects.
But Canada’s ability to diversify export markets is limited. These markets often don’t exist, even if Canada had free-trade deals with all the Group of Seven nations. Most international trade occurs within three regional trading blocs—Southeast Asia, Europe and North America. Geographic proximity is crucial, and much international trade is the movement of products between companies within supply chains. Opportunities to diversify such trade, especially Canada’s auto exports, outside North America are essentially nil.
That means Canada needs a strategy toward the U.S. that won’t dig a deeper hole for both countries. Sending a steady stream of supplicants to the White House pleading for exemptions reinforces Mr. Trump’s power to impose his will, inviting further rounds of threats. Retaliatory tariffs are emotionally satisfying but punish Canadians with higher prices along with U.S. producers.
The best strategy is to call Mr. Trump’s bluff and dare him to impose and maintain higher tariffs. There’s no chance that auto production can be shifted to the U.S. in one year, let alone by April 2, when the 25% tariff on auto goods and many other Canadian products is scheduled to go into effect. The tariff could cause U.S. vehicle prices to soar by as much as $12,000, according to the Michigan-based Anderson Economic Group, as auto parts cross the border several times during assembly.
Let Mr. Trump explain to Americans why they are paying 20 to 40 cents more for a gallon of gasoline—the result of his planned 10% tariff on Canadian oil and gas—and thousands of dollars more for vehicles. Consumers and the Federal Reserve are already worried about inflation accelerating, the opposite of Mr. Trump’s promise to lower prices on day one. Even absent higher prices, there is limited public support for tariffs on Canada. A Jan. 28 poll by Innovative Research Group found that 76% of Americans, including a majority of Republicans, don’t support a 25% tariff on Canadian products.
Canada should follow Australia’s example in dealing with a regional trade bully. After Australia called for an international investigation into the origins of the Covid virus in 2020, China enacted tariffs and restrictions on a wide range of Australian exports. The damage was minimal, as China kept importing Australian minerals while Australia found new markets for many of its other resources. Canada can be confident that U.S. tariffs will hurt Americans and motivate affected consumers and producers to pressure Mr. Trump to reverse them. Trade wars, after all, end in stagflation.
There already has been lasting damage to the reputation of the U.S. as a trustworthy ally and reliable trade partner. Mr. Trump has made clear that America’s signature on any document is now meaningless, whether it is the U.S.-Mexico-Canada Agreement—which Mr. Trump himself negotiated—the North Atlantic Treaty Organization, the Columbia and Great Lakes water treaties, or even U.S.-Canada border agreements settled decades ago. It’s impossible to see how America’s long-term interests are served by its reneging on written agreements. The old adage holds that “trust arrives on foot and leaves on horseback." When it comes to the longstanding goodwill between the U.S. and Canada, that horse has bolted.
Mr. Cross, a former chief economist at Statistics Canada, is a senior fellow at the Macdonald-Laurier Institute and a contributor to the Center for North American Prosperity and Security.
