President Donald Trump’s latest tariff threat of 100% against Canada highlights the deteriorating relations between the two neighbors, but analysts don’t expect a trade war.
However, it could weigh in on the renegotiation of the U.S.-Mexico-Canada trade pact this year and possibly scuttle it.
Trump over the weekend threatened 100% tariffs on all Canadian imports if Canada signed a free-trade pact with China. The threats came after Canadian Prime Minister Mark Carney described a rupturing in the global world order in a speech at Davos and urged countries to unite amid the U.S.-China rivalry.
The speech came on the heels of Canada striking a limited, preliminary trade pact with China that would lower tariffs on Chinese electric vehicles and Canadian agriculture including canola oil. It was a move to rebuild the relationship, which has been strained in recent years with tariffs and other restrictions.
Carney this weekend stressed that Canada wasn’t seeking a free-trade pact with China and described the threats as the U.S. positioning ahead of the renegotiation this year of U.S.-Mexico-Canada trade pact.
Analysts played down the prospects the tariff threats will turn into reality. “100% tariffs would immediately cripple the Canadian economy but also immediately destroy the U.S. auto industry, prevent all the minerals and metals that come into the U.S. and impact the farm lobby, with 90% of the potash the U.S. exports coming from Canada,” says Chris Hernandez Roy, deputy director of the Americas Program at the Center for Strategic and International Studies.
Canada has been trying to diversify its trade, with the U.S. accounting for more than 75% and China just 5%. Roy said the Canadian delegation had alerted the Americans of its trade plans with China and he expects the Canadians to increase back-channel dialogue to ensure the Americans understand that the China deal is limited in scope—with the lowered tariffs on electric vehicles only affecting about 2% of Canada’s autos.
A spokesman for the Canadian embassy didn’t immediately respond to a request for comment.
Analysts see the bigger point of contention coming as Canada enters renegotiations of the U.S.-Mexico-Canada trade agreement struck in the first Trump term. Henrietta Treyz, head of economic policy research at Veda Partners, sees the U.S. pushback as a precursor to the White House trying to withdraw from USMCA in favor of bilateral relationships with Canada and Mexico.
Treyz says U.S. companies know implementing such a withdrawal will take years, with companies aggressively lobbying in coming months to protect their supply chains after spending decades integrating them across the three countries. The pact represents the bulk of trade between the U.S. and Canada and a breakup would create volatility for an array of manufacturers—not just automakers but also those making airplane parts and other industrials, as well as anyone reliant on metals or energy as inputs.
Leading up to the talks, there could be more friction—including more talk of Canada as the 51st state. Roy is closely monitoring a separatist movement in oil-rich Alberta trying to force a referendum. The movement is still in a minority but Roy says it is worth watching what the Trump administration says about it. Supporting such a movement, he adds, would run counter to U.S. foreign policy for the last 40 years that has firmly opposed any breakup of a NATO ally.
Write to Reshma Kapadia at reshma.kapadia@barrons.com