After President Trump signed executive orders imposing sweeping tariffs on Canada, Mexico, and China to become effective February 3, 2025, the three countries immediately responded with their own retaliatory counter measures. While Trump has temporarily paused the tariffs on Canada and Mexico for 30 days, the risk remains high, with the possibility of another tariff war erupting in less than a month.
How did we get here? And do these tariff threats against Canada even make sense or have merit? Ivey Impact sat down with Professor Romel Mostafa, Director of the Lawrence National Centre for Policy and Management, to discuss.
Trump has repeatedly expressed frustration over Canada-U.S. trade relations. But is his claim that Canada’s trade surplus is hurting the U.S. actually true?
By now, it’s well known that Canada runs a trade surplus in goods but has a deficit in services with the U.S. Canada’s overall trade surplus is driven largely by energy exports, which are sold at significant discounts, benefiting U.S. industries and consumers tremendously. Less attention has been given on capital investments from Canada to the U.S. despite exceeding those from the U.S. to Canada. In 2023, Canadian Foreign Direct Investment (FDI) stock in the U.S. stood at approximately $1.1T, while U.S. FDI stock in Canada was $618B – highlighting a significant imbalance in cross-border investment that is directly linked to job creation.
If Trump thinks trade with Canada has contributed to hollowing out of U.S. manufacturing, he is misinformed. Early research by Daniel Trefler showed that there were disproportionally more job losses in Canadian than in U.S. industries that faced tariff cuts due to liberalization through Canada-U.S. Free Trade Agreement. However, in both countries, those industries invested and expanded substantially and became more productive. Recent research attributes U.S. manufacturing job losses to factors such as automation and rising Chinese imports, leading to wage declines and regional economic distress.
Canadian wages and taxes are generally higher than those in the U.S., which gives Canada, broadly speaking, a cost disadvantage. However, the integrated supply chains in several industries – from automobiles to machinery, equipment, food, and beverages – that have developed across the border over the decades are a result of leveraging each nation’s natural and comparative advantages. If anything, this integration has enabled North American-produced goods to withstand fierce global competition, rather than undermining U.S. manufacturing.
Of course, trade skirmishes are typical between trading partners. Canadians object to the U.S. Farm Bill, while Americans complain about Canada’s dairy supply management system. Such disputes are usually addressed through resolution mechanisms set out in a trade agreement and should not require the indiscriminate imposition of sweeping tariffs at exorbitant levels.
What do you make of the President’s focus on fentanyl, illegal immigration, and Canada’s defense spending? Do these concerns make a strong case for imposing tariffs?
Invoking these issues to justify the tariffs is simply absurd. Trade agreements don’t cover these matters. The US-Mexico-Canada Trade Agreement (USMCA) makes no mention of defense spending or illegal immigration, and only broadly references cooperation on transnational crime. These concerns are generally addressed through separate international agreements and bilateral cooperation - but not trade agreements.
Canada had already announced its intent to accelerate its defense spending to meet the 2 per cent of GDP NATO commitment by 2032, as well as other measures, such as the $1.3B enhanced border security plan. Yet, Trump used national security concerns related to illegal immigration and drug trafficking for imposing tariffs. I think there is a strong legal case to be made against the use of such emergency powers, given the evidence of very limited fentanyl trafficking or illegal immigration through the Northern border on one hand, and the disproportionate size of the tariffs imposed by the U.S., on the other.
Also, often overlooked is Canada's significant sacrifices in U.S.-involved conflicts. Recently, Canada was caught in the U.S.-China tensions over Huawei when it arrested the company’s CFO at the U.S.'s request, only for the charges to be dropped later. In retaliation, China imprisoned two Canadians for over 1000 days and imposed trade restrictions, leading to an estimated $5B loss in export value from blocked canola exports alone.
While issues related to illegal border crossing and defense spending may be irritants, do they justify a sweeping 25 per cent tariff? Really?
So, are you suggesting there may be other motives at play here?
I think that one cannot ignore the elephant in the room. Trump, as part of his broader economic plan, has promised to extend the 2017 tax cuts and decrease – if not totally do away with – income tax, while also reducing government spending and using revenues from tariffs to somehow balance his federal books. The math, however, doesn’t add up, and the tax outcome will be regressive. The tax cuts will largely benefit high-income individuals, while the higher costs of goods resulting from the tariffs will disproportionately affect low-income Americans.
He believes that deregulation and lower government spending, combined with lower taxes and high tariffs on imports, will induce or force firms to bring back jobs in the U.S. He is particularly infatuated with President McKinley’s approach, which combined imperial expansion – through the annexation of Guam, Hawaii, Puerto Rico, and the Philippines – with a protectionist industrial policy centred on tariffs.
Some proponents of Trump’s plan point to the 1920s, when tariffs were raised, creating short-term gains for some U.S. industries. What they don’t mention is that, at the time, supply chains were far less integrated, the U.S. was far less dependent on trade, and the primary drivers of growth had to do with the ongoing rapid adoption of technology (e.g., electricity) and management innovations (e.g., assembly line production). More importantly, they fail to acknowledge how trade wars, just a few years later, worsened economic hardships in the U.S. and around the world, ultimately leading to a full-blown depression.
If Trump remains steadfast in his plan, tariffs could become a long-term policy tool, institutionalizing a flawed economic strategy. We may want to revise our expectations: instead of a temporary trade dispute followed by a new agreement, we could face a protracted trade war. What once seemed like a short-lived disruption may now be a fundamental shift. This is what keeps me up at night.
Canada stands at a pivotal moment in its relationship with the U.S. From a policy perspective what should Canada do from here?
I’m going to borrow our dean’s twin-engine strategy metaphor and apply it here. The first engine should actively focus on negotiation to prevent escalation, build alliances with stakeholders in the U.S. to push back against tariff wars, and develop a plan to cushion the impact on our economy if tariffs are imposed. The second engine must drive policy to unlock Canada’s competitive advantage. This includes – but is not limited to – streamlining natural resource permitting and enabling critical trade infrastructure to be built, developing smart and more agile regulation, eliminating interprovincial trade barriers, reducing government spending while prioritizing productivity-enhancing investments, and fully leveraging our other trade agreements while supporting product placement in international markets. Otherwise, we risk losing capital, talent, and markets – and I don’t need to tell you the socio-economic ramifications of that.
Ivey’s Lawrence National Centre has been at the forefront of many of these issues – bringing together key industry leaders, government officials, and other stakeholders to advance policy and drive action. In the coming weeks and months, we will intensify our initiatives.
What gives me hope is that, despite political uncertainty in Ottawa, this crisis has united Canadians. This is a pivotal moment. We have to leverage this unity and act decisively. We must fire on all cylinders of both engines to navigate this existential threat.
