Canada’s trade and economic policies have been thrown into a state of chaos in the weeks following United States President-elect Donald Trump’s threat to impose 25 per cent tariffs on Canadian and Mexican exports to the U.S.
The federal government is now suffering an internal crisis with the resignation of Deputy Prime Minister and Finance Minister Chrystia Freeland. Canada’s provincial premiers, led by Ontario’s Doug Ford, have responded by emerging from a recent meeting asserting their leadership roles in terms of trade and foreign policy.
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Unfortunately, the provinces are too fragmented and divided among themselves to provide effective and co-ordinated responses to Trump without federal leadership.
This point was highlighted by Ford’s efforts to present a united front on behalf of his fellow provincial leaders. He found himself promptly denounced by his colleagues when he threatened to cut off energy exports to the U.S. if the Trump administration followed through on its tariff threats.
Improvised and contradictory responses will do nothing but encourage Trump to continue to engage in these sorts of threats and behaviours. That point has been repeatedly emphasized by members of Trump’s previous administration.
Canada now needs to use its substantial negotiating assets against Trump given his threat represents a flagrant violation of the United States-Mexico-Canada (USMCA) trade deal and previous trade agreements between the U.S. and Canada.
These accords were designed, from Canada’s perspective, to prevent the U.S. from engaging in precisely the sort of unilateral trade action that Trump is now threatening.
Canada’s energy advantage
Central to that understanding had been the concept that Canada would guarantee the U.S. access to its energy resources. In exchange, the Americans consented to a formal and binding dispute resolution mechanism when trade disputes arise, and agreed not to engage in unilateral trade actions.
Because so much Canadian energy flows to the U.S., this provides an obvious leverage point.
AP Photo/Evan Vucci)
Canada’s position in this regard has actually been reinforced by the previous Trump administration’s actions. The original 1988 U.S.-Canada Free Trade Agreement and the 1994 North American Free Trade Agreement (NAFTA) contained provisions guaranteeing American access to Canadian energy on an equal basis with Canadian consumers.
Trump agreed to remove these energy proportionality provisions from the USMCA. This has handed Canada an important energy bargaining chip in dealing with a second Trump presidency.
Where Ford was right — and wrong
Ford may have had the right idea in suggesting restrictions on Canadian energy exports to the U.S. in retaliation for Trump’s tariffs. But he was too direct in his approach, and his suggestion of outright export bans was immediately rejected by his fellow premiers.
Ford’s idea was even impractical for his own province. Ontario’s electricity exports to the U.S. are relatively modest and essentially transactional. Trade with neighbouring states and provinces is necessary for the management of Ontario’s own electricity grid.
Specifically, there are times when Ontario needs to export electricity, sometimes at “negative” prices, meaning the province has to pay its neighbours to take electricity off its hands. This has been the case especially when the output from Ontario’s inflexible nuclear power plants exceeds the province’s grid demand and needs somewhere to go.
THE CANADIAN PRESS/Sean Kilpatrick
That said, because Trump’s threats violate the foundations that have defined the Canada-U.S. trade over the past four decades, a response in the area of energy would be justified and strategic.
But rather than imposing direct export restrictions on Canada energy exports, a smarter approach could involve the threat of retaliatory charges on Canadian exports of energy and other resources to the U.S. Such charges would significantly increase energy and other costs for Americans.
An export charge could be applied directly by the federal government. That would bypass the objections of provincial premiers and impose some unity on Canada’s approach.
Engaging American states
Canada’s premiers would be smarter to focus on engaging with their sub-national counterparts in neighbouring states rather than conducting their own freelance diplomacy.
In particular, they should encourage the governors of Great Lakes states to emphasize to the incoming administration and congressional representatives the extent to which Trump’s proposed tariffs would do as much harm to their economies as they would to Canada’s.
Ford is particularly well-positioned to engage in this sort of province-to-state diplomacy. The level of integration between Ontario’s vehicle manufacturing sector and the manufacturing economies of the now Republican-leaning states around the Great Lakes mean that Trump’s tariffs would be enormously disruptive to their economies as well.
THE CANADIAN PRESS/Chris Young
At the national level, Canada needs to recognize that the assumptions that have underpinned the Canada-U.S. trade relationship for the past 40 years are in the process of being shattered.
If Canada is to avoid simply offering itself up as a fragmented and compliant American resource colony, it needs to formulate a strategy that leverages its assets, particularly energy.
Canada also needs to strengthen its wider economic and political alliances with the rest of the Americas, Europe and Asia. Whether Canada’s federal and provincial leaders are up to these tasks remains an open question.