Our Trade Odyssey - Part I: The Tangled Web We Wove

There are different theories as to why Trump is using tariffs as a tool to "Make America Great Again". Some think he is bluffing, others believe his is simply being reckless, without a clear idea of the consequences for the US economy. Still others suggest it is a more ideologically sinister attempt to disrupt the geopolitical order.

I believe that there are elements of each of these intentions in the US trade and tariff actions. When I hear US Commerce Secretary Howard Lutnick complain that Canada is "tone deaf" to why the US is imposing tariffs, and launching our own tariffs in response, like most statements emanating from the White House, I have to retort: "What are you thinking and what did you expect us to do - roll over and wave the white flag?"

The result is that we are left to either spend our time parsing intent, or chart a path through the chaos. It is my contention that given Trump's predatory disposition he thinks he can gain advantage by exploiting weakness in his adversary. Make no doubt about it - to him, like all other nations who he considers has been "ripping America off", we are an adversary. Like most of Trump's narratives, despite the exaggeration and erroneous recitals of fabricated data, his belief system is such that if he says it, it is true. Therefore tariffs are an economic weapon to bring his adversary to their knees.

Given this disposition the only choice we have is to go on the offence and chart a new path in our trading relationship with the US over the next four years and beyond.

The Prospect of Disentanglement:

Disentanglement from our trade with the United States will not be easy. It will take years to accomplish - but this is what we must do for our own survival and strategic interests.

With over 75% of our trade (merchandise and services trade) directed to the US, it is easy to understand why the threat of tariffs have Canadian exporters shaking in their boots. For over a century it has been easier to trade with the United States than it has been to trade across our vast country, sometimes for reasons other than geography. Over 80% of our key population centres are within 250 kilometers of the US border. Transportation linkages, beginning with our shared waterways developed over hundreds of years have contributed to the lure of North-South commerce. Internal trade barriers within Canada have also exacerbated that pattern of trade.

Historic trade negotiations, beginning with the Canada-US Auto Pact (1965) which integrated trade on most automotive parts and equipment started the progression of trade agreements to follow. The subsequent Canada/US FTA (1988) which covered a wide range of goods, services, intellectual property and government procurement was superseded by NAFTA (1994) including Mexico into the partnership. The same parties to NAFTA revised their trading relationship with the USMCA (2018), which remains for the moment, the operative framework for approximately $1.5 trillion in collective trade. This succession of internationally admired accords has facilitated the linkages between all parties and created the largest, liberalized trading zone in the world.

Consequently, the relative ease with which Canadian goods and services have entered the US market has contributed to our export dependence. While favourable access has been a boon to our economic development, the extent our reliance on the US market for our economic well-being, has, with the current devolution of our relationship, become a curse. 

It has not been one sided. American jobs and economic well being has improved with the trade between our nations. The auto industry is a case in point. US firms have benefited from the innovation and productive prowess of our parts manufacturers, including the tool, die and mold industry, to the extent that it is less costly for US based assembly operations to source these products and services from our market. The Automotive Parts Manufactures Association has documented over 25 Canadian companies that operate 170 plants across 26 US states employing approximately 48,000 workers.

Moreover, any attempt by these firms to disentangle the supply chains or to undertake capital intensive new investment in additional plants and equipment in the US, foists excessive additional costs on an industry that has found profitability in the way things are working at the moment. The CEOs of GM, Ford and Stellantis (Chrysler) have attempted to impress these facts on the President. However, his rip off narrative continues.

The spirits and beverage industry is another case in point as both sides are resorting to weaponizing this sector. The linkages here run deep with plants on both sides of the border making and distributing each other's product under license, accounting for billions in sales and mutual profits.

These are just two of many sectors that have deep linkages in each other's market, to mutually beneficial ends.

Whether disentanglement to a degree that satisfies the American administration can be accomplished is a moot point. Given the extent of our "entanglements", any effort to reverse the situation will take years, perhaps decades. Whether this process actually happens or is gradually undertaken, remains to be seen.

In the meantime, if we have learned anything from the current circumstances, we need to pursue options that provide alternatives to a overwhelming dependence on the US market.

The first option to be considered is diversification of our trade to other foreign markets. This option is discussed in Part II of Our Trade Odyssey.