Trump threatens economic coercion
National unity takes priority, everything else is secondary
TLDR:
The first principle of Canadian foreign policy is maintaining our national unity.
Trump’s threat to use economic coercion to annex Canada may be performative, but it’s an existential threat for Canada. Everything else is secondary to maintaining our national unity. That includes winning the next election (so we need to be restrained in our usual partisan fights), and it also includes climate change (especially important when it comes to Alberta).
Trump’s been talking about the US annexing Canada since November, but it was a couple weeks ago that he really struck a nerve.
U.S. president-elect Donald Trump talks of using ‘economic force’ to annex Canada. Steven Chase, Globe and Mail, January 7.
U.S. president-elect Donald Trump said he would be willing to use “economic force” to coax Canada into a political union with the United States, a remark that was roundly rejected by federal political leaders on Tuesday.
He made the comments during a news conference at his Mar-a-Lago estate in Florida on Tuesday, after he was asked whether he would consider using military force to acquire Canada. “No,” he said. “Economic force.”
“Canada and the United States: That would be really something,” Mr. Trump continued. “You get rid of that artificially drawn line and you take a look at what that looks like.”
He explicitly refused, upon repeated questioning, to rule out the use of force when it comes to Greenland or Panama – behaviour that is normally limited to authoritarian leaders.
“It might be you have to do something,” he said.
Jonathan Chait on Trump's "performative imperialism":
Trump uses his international bullying as fan service for his base. The actual, concrete policy agenda of Trump’s presidency consists largely of boring regulatory and tax favors to wealthy donors and business interests — priorities that most of his voters don’t care about. Trump seems to grasp the need for public dramas to entertain the MAGA base.
Trump could very well blunder from performative imperialism into a live shooting war. (When I was a kid, my teachers banned play-fighting at recess on the sound basis that it often led to the real thing). More likely, he will antagonize allies and provoke voters in those countries to elevate nationalist leaders of their own who will stand up to the United States rather than cooperate with it.
This would be a long-term cost to American foreign policy purchased for fleeting political gain — mortgaging the interests of the country to extract immediate value for Donald Trump. That form of arbitrage is precisely the kind of deal that Trump long ago turned into an art form.
The importance of national unity
Louis St. Laurent, The Foundations of Canadian Policy in World Affairs (1947):
The first general principle upon which I think we are agreed is that our external policies shall not destroy our unity.
No policy can be regarded as wise which divides the people whose effort and resources must put it into effect. This consideration applies not only to the two main cultural groups in our country. It applies equally to sectionalism of any kind. We dare not fashion a policy which is based on the particular interests of any economic group, of any class or of any section in this country. We must be on guard especially against the claims of extravagant regionalism no matter where they have their origin.
Our history has shown this to be a consideration in our external policy of which we, more even than others, must be perpetually conscious. The role of this country in world affairs will prosper only as we maintain this principle, for a disunited Canada will be a powerless one.
The Canadian response
In the face of an existential threat, there was near-unanimity across the political spectrum in rejecting the prospect of American annexation.
Trudeau: “There isn’t a snowball’s chance in hell”
Poilievre: “Canada will never be the 51st state”
Jagmeet Singh: “We are proud Canadians”
Chretien: Canadians will never give up the best country in the world to join the U.S.
Warren Kinsella: If you support Trump over Canada, get the hell out. Reddit thread.
The same day, Doug Ford appeared on a Fox News Channel show hosted by Jesse Watters. I thought he did a good job of staying cool in the face of immense provocation, sticking to the message that Canada and the US should work together in partnership. Ontario premier responds to Trump floating the annexation of Canada: 'Property's not for sale.'
Watters:
If I were a citizen of another country and a neighbor of the United States, I would consider it a privilege to be taken over by the United States of America. That’s what everybody else in the world wants. American citizenship. For some reason that’s repellent to you Canadians and I find that personally offensive, Premier.
Ford:
You know something, Jesse, we are proud Canadians, just like you’re proud Americans.
US imports from Canada
The next day, Jonathan Wilkinson talked about US dependency on Canadian natural resources at greater length. The message is similar to Ford’s: Canada and the US should be working together in partnership. Canada Energy Minister Warns Trump Against an Oil Trade War. Brian Platt, Bloomberg News, January 8.
Q. What is your response to Trump saying the US doesn’t need anything from Canada?
That’s simply false. The United States derives enormous economic value from Canada, and it does so with resources that it would have a very difficult time accessing from others. If you look at oil, we provide heavy crude. Most of the crudes that are produced in the United States are light sweet crudes. The refineries in the Midwest are set up for heavy crude, and they have no alternative to the use of Canadian resources — not that’s economic. Even the alternative that exists for some of the Gulf refineries for heavy crude, it’s Venezuela. Are you really telling me the Americans are more interested in buying crude oil from Venezuela than from Canada?
It’s also true of critical minerals where we provide significant amounts and have the opportunity to provide much more. Their alternative is to buy from China. And that’s actually not an alternative in some cases, because the Chinese have banned the export of a certain number of critical minerals.
The same thing is true with uranium. The same thing is true with potash, where yes, they do have an alternative: it’s called Russia, which is not the most stable nor dependable source either. In the case of hydroelectricity, where there’s enormous trading on the West Coast and there’s enormous amounts of electricity that go from Quebec to particularly Boston and New York, there is no alternative.
Q. Can Canada allow a situation where Trump imposes broad-based tariffs but exempts oil?
We obviously are working to dissuade him from the tariffs generally. If he were to put in place broad-based tariffs that exclude energy, for example, Canada would still need to respond. There’s no way that Canada’s going to stand by and watch the decimation of our auto industry or other industries. We will need to respond in a thoughtful way, in ways that actually create maximum pressure on the president and on states that derive benefit from the trade they do with Canada. So I’m not sure it would fully change anything about our strategy.
Q. Would export taxes on oil be on the table in a situation like that?
I don’t think anything’s off the table. But as I say, my first point of departure is to convince the administration that there’s more that we can do by collaborating together.
Look, if they put tariffs on oil, it will cause prices at the pumps to go up in the United States. There’s no way around that. If they put a tariff on electricity, on hydroelectricity, the price that consumers pay for electricity is going to go up. If they tariff potash, American food producers are going to have to pay that price and food prices in the United States are going to go up. Over a relatively short period of time, they are going to see increasing prices and increasing inflation. That’s the antithesis of what President Trump said he wanted to achieve when he was campaigning to be president.
And in that vein, there are a whole range of projects that we can put on the table that can actually help them. So for example, one of the critical minerals that was banned by China being shipped to the United States is germanium. There is a mine in Alaska that produces a concentrate that has germanium. It is processed at the Teck facility in Trail, British Columbia. There is an opportunity to significantly expand the amount of germanium that is produced through that. American mine, Canadian processing, used in the United States largely for defense applications — isn’t that a better way to think about how we leverage our relative capabilities than tariffing each other?
Alberta and national unity
Alberta’s economy is exceptionally vulnerable to US trade restrictions, and Alberta already has grievances:
The BC NDP government under John Horgan attempted to obstruct the TMX pipeline expansion project, giving Kinder Morgan cold feet. (Trudeau used the biggest hammer available, burning a lot of political capital in BC, by buying the project outright. This made it a federal project that couldn’t be blocked by the BC government. It’s now operational, in the nick of time.)
Federal equalization - Alberta is a significant contributor. Trevor Tombe teaches a one-day course on this subject; he’s scrupulously fair.
More generally, Albertans feel like a breadwinner who’s not just taken for granted, but harshly criticized for destroying the environment. The proposed cap on emissions from oil and gas production isn’t helping. (Carbon pricing - which is still likely to apply to industrial emissions even if the Conservatives win the next election - is supposed to be the main policy, as opposed to singling out a particular industry.)
Given this situation, I think the federal government needs to tread lightly.
Trump’s clearly pursuing a divide-and-conquer approach, and one of his targets is Alberta premier Danielle Smith. For example, when she was in Mar-a-Lago, he may have dangled the prospect of exempting oil from the tariffs.
There was an in-person meeting of the prime minister and the premiers which she attended remotely (she was on vacation), and she refused to sign a joint federal-provincial statement after the meeting, issuing her own statement.
Start looking for ‘Made in Canada’ products, Ford says ahead of looming Trump tariffs. Phil Tsekouras, CTV News, January 15.
“First Ministers are committed to continuing to work together on a full range of measures to ensure a robust response to possible U.S. tariffs, including supports for sectors, businesses, and individuals. If the federal government implements retaliatory measures, it will ensure the rapid availability of substantial resources that effectively mitigate economic impacts to workers and businesses,” read the statement which was signed by all premiers except Alberta’s Danielle Smith.
The Alberta premier said while she agreed on several strategies discussed in the meeting, she did not agree on imposing export tariffs on Alberta energy as a possible retaliatory measure.
When asked about Smith’s response, Ford, who is the chair of the Council of the Federation, said he respects his Alberta counterpart and her concerns about protecting her province’s products but “country comes first.”
“So again, we all have different views, and we can respect each other’s views, but at the end of the day, when the tariffs come, it’s going to affect Albertans. It’s going to affect people from B.C. and Saskatchewan and Manitoba, Ontario, Quebec - all the way down the road. No one’s exempt from that.”
“This [hat] is an example of how we need to unite and we can not let president Trump divide us. He’ll be sworn in in a week and then he’s going to lay the tariffs on Canada. He’s going to try to devastate our country, he’s going to try and divide our country, and we cannot have division in our country,” Ford said.
As of late, Ford hasn’t said exactly what retaliatory measures he is considering should the tariffs take hold, however he has said the province could potentially shut off Ontario power to the 1.5 million homes south of the border that use it.
“I can tell you one thing: nothing’s more important than the country. And when we’re defending the country, we don’t roll over. You’re in a card game, you don’t show your opposition your cards. If you have some aces, you hold onto those aces,” he said.
Alberta economist Kent Fellows has a proposal that sounds very promising. Twitter thread.
Cutting off oil and gas supplies is a bad idea, but: Curtailing production to drive up prices isn't a bad idea.
Canada (and the US) are somewhat unique as oil producing countries in that we have competitive markets rather than a state owned oil company (Saudi Aramco, Rosneft, Sinopec, PEMEX, etc.)
This is a choice, and under the usual economic circumstances it's a responsible one.
The choice is based on a commitment to free markets and competition. Specifically, we allow for a competitive industry in order to balance the interests of producers and consumers.
In a competitive industry, individual firms have limited market power. That means, a single firm acting on it's own can't just reduce production to cause an increase in prices. A single firm is (or should be) too small to do this in a meaningful way.
If it tried, it would find that it would quickly lose market share to other firms in the sector who would expand, and the price wouldn't rise (or wouldn't rise much).
But, large state owned producers are more strategic... because they can be.
A giant like Aramco (or, in fact, the OPEC cartel acting as a single agent) recognizes that it is big enough to affect a change in prices through changes in output.
These firms balance output restrictions against price increases.
OPEC might not quite be profit maximizing (there's lots of interesting stuff that goes on in a Cartel, specifically that individual members would like to cheat on the collusive outcome, but I don't want to get too far off topic).
Back to thinking about Canada and Alberta:
We typically limit firms ability to collude for exactly this reason: Collusion hurts consumers because it lets firms collaborate to reduce output and increase prices.
If multiple firms agree to all cut production (or if they are forced by a government to do so) then they collectively CAN exercise market power.
They can collectively cut production and drive up prices without concern of a competitor undoing the effect by expanding production to cover the difference.
In Canada, the federal "Competition Act" is the legislation preventing firms from colluding to drive up prices. In some cases collusion is a criminal offence and people can do jail time for it.
Oversimplifying a bit, this legislation protects consumers from the high prices and reduced output that would result from collusion.
In the case of Canadian crude oil, about 80% of the consumers being protected by this legislation are American.
So depending on how you look at it, right now we have federal legislation that restricts the industry's ability to profit in order to protect Canadian (20%) and American (80%) consumers.
And, because the provincial government royalty revenues are structured as an effective share of profits, this legislation also limits Alberta provincial royalties (again, for the benefit of Canadian (20%) and American (80%) consumers).
I am absolutely not advocating that Canada take the State Owned Oil Company approach. But it is worth considering if we should or could either:
Exempt crude oil producers from prosecution under the Competition Act until any Trump Tariffs are lifted, or
Impose curtailment at the provincial level to mimic the kind of industry profit maximizing collusion we would see if this industry was exempt from competition law.
The increase in provincial royalties could likely more than compensate the Canadian consumers (20%) for any domestic price increases (as per Alberta's "Ralph Bucks" in days of yore).
Unlike retaliatory tariffs (or cutting off supply completely) this has the benefit of... being a benefit to the Canadian economy. Domestic public revenues and private profits would increase, and lower production means lower costs.
It's worth noting that trying to do this via export restrictions won't have the same effect since domestic companies would still try to compete with each other (and domestic prices would tank).
Export restrictions (rather than production limits or collusion) would mimic the impact of insufficient pipeline capacity in 2018 to 2020 (which required curtailment to mitigate the dramatic reduction in WCS prices).
(For the economists: Think about the tariff the same way you would a tax. Then, economic incidence of the tax is determined by relative elasticity of supply vs demand. Collusion/curtailment makes supply more elastic, which shifts the burden to consumers.)
No, we do not face an existential threat from economic sanctions alone. Frightening Canadians does not serve our best interests, or our negotiating position.