Halting at the brink
Canada faces off against a "restless, aging king"
Latest from the trade war: after threatening 25% tariffs on all imports from Mexico and Canada, Trump postponed them at the last minute, to March 1. And he’s now signed an order imposing 25% tariffs on steel and aluminum, starting March 12.
Heading for the brink
On Saturday February 1, Trump announced that 25% tariffs on all imports from Canada and Mexico would start on Monday February 3.
On the same day, Trudeau announced retaliatory tariffs, focusing on final goods rather than intermediate goods.
Trudeau’s announcement on February 1, speaking directly to both Americans and Canadians.
Maintaining national unity
After Trudeau’s speech, a reporter asked if Canada would consider restricting energy exports. My interpretation of his answer is: not if Alberta is opposed.
In regards to actions we might take in terms of responding to the Americans, there are a number of different industries and regions of the country that can have greater leverage over the United States. One thinks of the oil industry, for example.
What is extremely important for me, and I think for all the premiers, is that no one region of the country or one industry carries a larger burden than anyone else. In standing up for Canada, we need to all be in this together. This only works if Canadians are fully united, to stand up for this extraordinary and beautiful country.
And that's why as we look at different measures, including non-tariff measures, that we might move forward on, we will not be moving forward on issues that further divide the country. Which is why we're working with all premiers to look at different ways we can encourage the Americans to step back from these trade actions.
A followup question:
You said earlier that you're not going to move forward on measures that would further divide the country. Does this mean that blocking energy exports is fully off the table?
Answer:
It means that any conversations around further measures, particularly involving one industry or one region of the country more than another, is something that we're going to do carefully and thoughtfully and with the full partnership of provincial premiers and businesses. No one part of the country should be carrying a heavier burden than any other. We're in this together, we're all going to stand together, and we'll be there for each other.
Tariffs on final goods vs. intermediate goods
When preparing its list of retaliatory tariffs, Canada’s focus was on final goods rather than intermediate goods. Trevor Tombe on Twitter:
Retaliatory tariffs will apply to ~30% of Canada's imports from the U.S.
While the list of items is not yet out, this amount suggests to me that intermediate inputs will largely avoid a tariff on Canada's side, which mitigates some of the #cdnecon costs from this response.
And just to be clear: this is not a "dollar-for-dollar" response that many have pushed for. Threaded the needle to have a large response, but not unduly disrupt production within Canada. This package appears to be the most that could be done without crossing that line.
Jared Polis, Colorado’s governor, explained on Twitter how taxing raw materials and intermediate goods provides a strong incentive to move manufacturing out of the US, outside the tariff wall.
Most people already understand how tariffs function like a sales tax, and increase the cost of all items covered from food to clothes to construction materials. Tariffs of 25% with our closest allies and trading partners, Mexico and Canada, would painfully raise prices on everyday items and reduce the purchasing power of every American.
But tariffs are far worse than just increasing the costs of goods, they also hurt American manufacturing and destroy jobs in two key ways:
1) For every action, there is an equal and opposite reaction. Meaning that the countries we impose tariffs on will certainly put retaliatory tariffs on made in America products. This will hurt American exports, making them more expensive in overseas markets, and less competitive, translating to less demand for made in America and grown in America products and destroying jobs.
2) Nearly all manufactured goods have raw materials and parts that are sourced globally. That means that with tariffs, factories and manufacturers in the United States would be forced to pay a surcharge on parts and raw materials imported from our largest trading partners. Companies would therefore be more likely to shutter American factories and invest and grow production and manufacturing outside of the United States in other countries that don’t have these tariffs, particularly on goods manufactured for the global market.
The Wall Street Journal put it very well by calling Trump’s proposed tariffs and trade wars “one of the dumbest in history,” truly a self-inflicted wound on the purchasing power of American families and on our economy and jobs. I truly hope that President Trump is looking for some kind of settlement to avoid this destructive nonsense, because the tariffs would set off a trade war with devastating negative impacts on our standard of living and our economy. There is still time for an off-ramp and to save face, but a global (or western hemisphere) recession is sadly the most likely outcome if these trade wars proceed.
Halting at the brink
On Monday February 3, Trump announced that he was delaying the tariffs on Mexican imports for one month, after speaking to Claudia Sheinbaum. After two calls with Trudeau, he announced that he was also delaying the tariffs on Canadian imports by one month.
Tariffs on steel and aluminum - bad for US manufacturers
Latest news is that on Monday February 10, Trump has signed an order imposing tariffs on imported steel and aluminum, starting March 12.
The Economist: Duties on aluminium and steel will throttle American industry and fragment global markets.
The volumes at stake are significant. America imports 25% of the steel it consumes, four-fifths of which is currently free of tariffs under agreements with Canada, Brazil, Mexico and the EU, its biggest suppliers, as well as other countries. America also imports 70% of its aluminium, some 60% of which comes tariff-free from Canada. The levies would therefore target commodities Uncle Sam mostly receives from friends, rather than from foes such as China and Russia.
In principle, there is now space for metal production to increase. America’s raw-steel mills are used to around 60% of capacity (80% is seen as the optimum). In reality, America will still lack the expertise to produce plenty of refined products at home, says Matthew Watkins of CRU, a consultancy. For instance, even after Mr Trump’s first tariffs, America continued to import just as many high-value-added products—including packaging steel and seamless tubes, which contain and transport liquids and fuels—from Europe as it did before. America has few aluminium smelters, and building new ones can take years. In the interim it will continue to rely on imports.
Continued threats of annexation
Why is Trump fixated on annexing Canada?
Dan Drezner suggests that it’s connected to his scorn for international trade: instead of trading for Canadian resources, why not annex Canada?
Since winning the election, however, Trump has sounded a different tune, refusing to rule out the use of force to seize control of Greenland and the Panama Canal. His supporters are talking less about restraint and more about how Greenland has a treasure of critical minerals and that possession of it “would make sense … for war purposes.” Foreign leaders are rattled.
What is going on? There are some disturbing parallels between how great powers are behaving today and how they started behaving in the late 1930s. In both eras, the proliferation of economic sanctions and embargoes caused great powers to fear that they would be cut off from critical resources. Their reaction to that threat, in turn, helped to escalate great power conflict.
Nicholas Mulder chronicled how League of Nations sanctions against Italy after its invasion of Ethiopia in 1935 served as an important prelude to the outbreak of World War II. In the end, the sanctions failed to work, but it was a near-run thing. Italy’s exports contacted by more than a third, and Rome was on the precipice of a balance of payments crisis. Benito Mussolini later told Adolph Hitler that had the league successfully expanded the embargo to include oil — it couldn’t because of U.S. non-participation — Italy “would have had to retreat in Ethiopia. It would have been an unmistakable catastrophe.”
Mulder argues that the league’s sanctions against Italy triggered a vicious spiral that made war all the more conceivable, as they “accelerated the search for a very specific form of economic autarky: resilience against sanctions or a blockade that cut off imports of raw materials.” This, in turn, strengthened the appeal of territorial conquest as a way of securing those resources. “Economic pressure, meant to restrain aggressive expansion,” Mulder concludes, “now began to accelerate it.”
How should Canada respond?
We're in an asymmetric conflict, so it's important to exercise restraint. Michael Jay Tucker, writing on September 16, 2001:
What puzzles me most about the NYC and DC bombings is that they seem, well, in violation of the basic rules of unconventional warfare, at least as I understand them.
The trick of unconventional war is, paradoxically, never being too successful. That is, in an unconventional war ... in which a weak group is in conflict with a relatively stronger one ... the guerrilla, the terrorist, the "freedom fighter" must convince his or her adversary that pursuit of some course of action will be unprofitable. You, the freedom fighter, must make the greater power believe that keeping troops in an area, or refusing independence to a colony will generate too many casualties or cost too much money to be worth the effort. That's exactly what the North Vietnamese did to us in our late Indochina war.
But, if you're too successful, and SO damage the greater power that it becomes convinced that it cannot survive you unless it destroys you ... Well, then, all bets are off.
Canada acquiring nuclear weapons would make Canada an existential threat to the US, and therefore an intolerable one.
Canada cutting off exports of oil, natural gas, and electricity to the US seems similarly unwise.
“A restless, aging king”
We need intelligence, i.e. information on what Trump is likely to do next. The Line posted a memo written by a Canadian working in the US, last November. It’s worth reading carefully.
What follows is an attempt to clarify the thinking of the incoming American administration for Canadian decision makers. I have spent more than a decade [working in this space]. I have never reached out this way before, but am doing so now because I think there is a basic misapprehension about the nature of our forthcoming relationship with the United States. For example, with respect to the experienced voices dismissing this week’s prospective tariff announcement as a negotiating gambit: yes - but also very much no.
The first thing to understand is that we are dealing with a political dominance play, not a trade negotiation. There is a trade negotiation taking place within that dominance play, but the economic goals are subservient to the primary aim, which is asserting superiority.
This stems from the structure of the incoming administration, which is effectively a feudal court wearing a representative democracy’s clothes. President-elect Trump is a restless, aging king with little interest in detail but a profound concern with image and status. The factions in his administration (court), which are still evolving but number at least six semi-coherent groups, have their own agendas and will work hard to take Trump's general statements and present him with outcomes or ideas in search of his favour or advancement. Each faction will have to compete with the other to find approval, and each will be incentivized to present more radical or innovative policy proposals.
What this means in practice is that we cannot assume that Trump will pursue an agenda that aligns with what we would consider to be America's rational economic best interest. Rather, this is an administration that is aiming to "win" according to its own emotive standards and metrics -- which usually include ensuring that someone else "loses." This is not about securing a better quality of life for Americans, it's about "Making America Great Again" with plays that assert dominance and control over both friends and allies, even at America's own material expense.
The incoming administration is broadly (though not universally) willing to accept economic pain in the USA to accomplish these goals, although there are already factional divisions on this point. Crucially, economic pain in the USA is politically useful to the President-elect, particularly where he can blame that pain on others; ie; 'evil foreigners hurting good working Americans to advance their own greedy agendas.'
Trump and many of the key members of the administration also understand their political capital will be at its peak over the next 12 months. As a result there are ambitious plans to act fast and dramatically. They feel they have a transformational mandate, and that the status quo is an existential threat to America.
Further to that point, our government and civil service are not well positioned vis a vis Trump’s court, or the new movers and shakers of the administration. Our diplomatic corps are simply not well integrated enough to grasp Trump Kremlinology. Lindsay Graham is not in the loop. Much of the administration's center of gravity is outside the beltway, wall street, and major institutions. We need to build capacity here, and quickly. This means building wider relationships with the Heritage and America First networks, the Mar-a-Lago club and its influential members, and Trump’s family and friends.
We need to discard previous expectations about “appropriate” escalation in forthcoming disputes and negotiations with the incoming American government. Appeals to the past or current standards will backfire. We need to expect a wide array of potential actions, including but not limited to:
escalating tariffs
visa requirements for Canadians entering the United States
cancellation of the Nexus program
restrictions or a total ban on energy imports
US ownership requirements for importing businesses
US Law Enforcement access to Canadians/Canada
a total border closure
Of course, there is no way for anyone, including myself, to know whether or not the incoming administration will actually follow through on any of these threats at this point in time. There will be a dizzying process of ‘flooding the zone’ and moving the goalposts in coming months. Clarity of aim and a solid read on the President’s shifting win conditions at any given moment will be essential. Success in this environment will require that we always understand the game being played within the game. But to provide a few examples of where things are heading: Jamieson Greer’s appointment as U.S. trade representative is a clear signal that tariffs are coming. Sebastian Gorka, the president-elect’s choice as senior director for counterterrorism, is deeply hostile to Canada and his remit includes elements of border security. ”Border Czar” Tom Homan is committed to across-the-board changes in American border policy, and to mass deportation - both of which will impact Canada.
In this environment, attempting to debate minute policy points in public, by, for example, fact checking Trump's claims on border security or drugs, is not only an utter waste of time, but will be regarded as provocative. Trump et al. will accuse Canada of a long list of sins in coming months, some of which will be correct, and some of which will be fabricated or exaggerated. No one we’re dealing with cares which is which. This is bait. The purpose will be the same regardless of the merits of the allegations: the assertion of dominance.
Strategically we have chosen to separate ourselves from Mexico. For Canadian purposes, the apparent decision by the Mexican government to take a hard line position in negotiations can be turned to Canada’s advantage. This gives Canada the opportunity to play helpful neighbour and be the first mover. It opens the prospect of a Trump Administration dissipating its political capital and energy on a political (and, perhaps, kinetic) fight with Mexico, giving Canada the ability to stay under the radar.
In a perfect world Canada’s Liberal government, Conservative opposition, and Premiers can engage in a kabuki play over the next 6-8 months. The government negotiates, talks a lot about the importance of Canadian interests, tut-tuts about threats. The opposition pushes on necessary reforms to border security, immigration reform, and moving to a 2% of GDP defence spend in short order. If the two parties coordinate, we can get some real reforms done under American pressure, while giving the Trump team the image of strained compliance they are seeking for emotional reasons - while doing things we already need to do for our own reasons.
Any strategy will require everyone to stay on the “working to maintain and deepen our most important strategic and economic relationship” talking point. Everyone else can network like crazy in private, but the administration is only going to negotiate with the federal government and anything else said in public will be used as leverage for its domestic base. If we don’t hang together we fall together.
As a political note, the Liberal temptation to try to run against Trump and pretend Poilievre is MAGA north is a bad plan for Canada, in addition to being ineffective electorally for the LPC. Even if the LPC can make Trump the bad guy they still wear the economic dislocation on top of their already massive negatives. They need to weigh the national cost of that political gambit carefully.
Canada is not in a position to refuse the Americans. Nor are we in a position to seriously retaliate. We are too deeply intertwined economically, and our diplomatic and international standing too weak, to “win” a confrontation. The Trump administration understands this; further, they know that we understand it.
We are facing an administration intent on forcing a confrontation, in which positive policy outcomes are a secondary consideration. No one of significance in Trump’s orbit cares about the details of their policy files with Canada - being “right” or “having the facts on our side” isn’t relevant. Our strategic imperatives need to be focused on damage mitigation, evasion, and rapid capacity building to improve our position vis a vis the United States for future negotiations. The next 8 months are a critical window.
The best country in the world
Jen Gerson and Matt Gurney ask: what are we willing to sacrifice to stay Canadian, instead of being annexed by the US?
Nationalism isn't really rational. I think of it (following Orwell) as psychologically identifying with a larger, more powerful, and potentially immortal entity, as a way to respond to one's sense of vulnerability as an individual. It becomes especially powerful in times of rapid and unsettling social change. Trump's attempted economic coercion certainly qualifies, which is why we're seeing a surge in Canadian nationalism.
I think the sentiment of “Canada is the best country in the world, that's why we live here” is especially strong among immigrants and visible minorities. The success of Canadian multiculturalism - a rigorous application of the small-l liberal principle of state neutrality with respect to culture and religion - helps a lot. Having grown up in Canada, I feel just as Canadian as anyone else. There's no single mold that all Canadians are expected to conform to.
Regarding the attractiveness or unattractiveness of the US, I would suggest that economically, the US is world-leading, but on the political side, US political institutions suffer from gridlock and paralysis. George F. Kennan argues in his memoirs that the US is simply too big to be well-governed, with tremendous distance between elected officials and ordinary voters. Looking at the US tax system, for example, compared to a smaller country like Sweden, the US tax system is remarkably inefficient. Or the financial sustainability of the CPP (similar to Social Security in the US): in 1995, the federal government and provinces agreed on reforms that made the CPP sustainable, while 30 years later, the US is still paralyzed on the issue.
To me, the legitimacy of Canada's government is basically Hobbesian: we need a way to resolve conflicts and find workable compromises. Canada's been able to do this remarkably successfully for the last 150 years, thanks to the strength of our institutions. To quote Joseph Heath:
Canada has succeeded in creating an extraordinarily well-integrated multicultural society, with a humane welfare state, along with a civil society strongly governed by norms of decency and mutual respect, and it has done so in the absence of either shared values or a homogenous background culture. It is precisely the ability of our social institutions to foster mutually beneficial cooperation in the absence of shared values that constitutes their peculiar genius. It is also what underlies our greatest historical achievements as a nation.
I think of Canada as a successful, pluralistic, multinational empire, something like the Austro-Hungarian Empire. It's not easy to hold Canada together, but Canadians have done it for generations. Most Canadians have little interest in giving up our institutions and traditions to join a polarized American political structure that seems on the verge of coming apart. Joseph Heath again: Americans enjoy conflict.
More
Nate Silver: The game theory of Trump's tariff threats. In a poker tournament where a player has a big stack, it makes sense to play aggressively. But in politics, what happens is that bullying provokes a nationalist reaction.
Paul Wells: The bad landlord. Trump as a bad landlord trying to harass tenants into giving in and leaving, with no self-restraint whatsoever.
Untangling the MAGA mind on tariffs. Mark Rendell, the Globe and Mail. It’s both a foreign-policy weapon and an attack on long-standing grievances. Economic coherence is less relevant.
B.C. fast-tracking 18 resource projects to reduce reliance on United States. Andrew Kurjata, CBC News.
Canada can do ‘substantial’ work fast on internal trade, Anand says. Uday Rana, Global News. It sounds like provincial ministers have agreed on mutual recognition of regulations. “In other words, respecting the rules in place in other jurisdictions. So, you don’t have to comply, if you’re a trucker, with moving your lights to a slightly different location if you cross a provincial boundary.”
The Future of Canada. Peter Jones, Philippe Lagassé, and George Petrolekas, with introductory comments by Dan Gardner. They argue for east-west trade and exports, stronger economic productivity, independent military capability, and a hard-nosed foreign policy with limited goals.
Previously: trade war, Trump threatens economic coercion, a super-sized Brexit.