The big Trump tar-“iff” now has a when: Feb. 1.
That’s when the busy new US president has promised to slap 25% tariffs on both Canada and Mexico. In his virtual address to the folks attending the World Economic Forum in Davos, Switzerland, on Thursday, President Donald Trump again singled out Canada for harsh treatment. “We have a tremendous deficit with Canada,” he said, reiterating his usual inaccurate tariff mantra. Trump claims the trade deficit is between US$200 and US$250 billion a year when it is significantly less than half of that, mainly due to energy exports.
Trump then followed up with his favorite new expansionist taunt. “You can always become a state,” he said to Canadians. “If you’re a state, we won’t have a deficit. We won’t have to tariff you.”
But what he said next was more dire because it was aimed directly at the industries that are core to the Canadian economy. “We don’t need them to make our cars,” President Trump said. “We don’t need their lumber, because we have our own forests. We don’t need their oil and gas. We have more than anybody.” In other words, we don’t need Canada at all.
Cue the economic peril clutching.
Let’s slow-walk through all this.
Will President Donald Trump really follow through with tariffs, or is it a negotiating tactic?
Yes, tariffs are coming the way cold comes in winter. Why so certain? Our general rule is to take the president of the United States both seriously and literally. As Trump said in his inaugural address, tariffs are now his primary source of government revenue, not just a tool for negotiation.
“Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens,” he announced. “It will be massive amounts of money pouring into our treasury coming from foreign sources.” He even floated the idea of an “External Revenue Service,” so tariffs are the flywheel in the engine that Trump promises will drive a golden age.
In his Davos speech on Thursday, the president emphasized the warning. “If you don’t make your product in America,” he said to a large group of CEOs, “then, very simply, you will have to pay a tariff, differing amounts, but a tariff which will direct hundreds of billions of dollars, even trillions of dollars, into our treasury to strengthen our economy and pay down debt.”
Is he right that high tariffs will really work for the US?
Not as promised. This is where the Trump math breaks down and politics and economics collide. Trump’s tariff threats will drive some businesses to keep factories in the US instead of, say, Canada. For example, this week Stellantis announced it was going to build the new Dodge Durango in Detroit and not move it to Canada as initially thought. It will also reopen a previously closed plant in Illinois to build another vehicle. So, expect some short-term “wins” from the America-first, protectionist agenda.
After all, in his first term, Trump used tariffs on goods like steel, aluminum, and products from China to more than double the amount the government collected from duties to about $111 billion.
Sounds like a lot, but it’s not. In 2023, the US government took in over $4.2 trillion in income and payroll tax. Even with 10% tariffs on all goods from China and 25% tariffs on Canadian and Mexican goods, the US government would take in only another $140 billion in 2025, according to the Committee for a Responsible Budget.
That’s not nearly enough to finance new tax cuts. For example, Trump has promised to extend his 2017 tax cuts in 2026. The Congressional Budget Office estimates doing so will cost about $4.7 trillion in lost revenue between now and 2035. That leaves a Grand Canyon-size hole that revenue from tariffs and savings from government cuts can never fill. Deficits will explode.
So will tariffs really be 25% across the board on Canada and Mexico, or will President Trump come down to a more manageable level on a few select goods?
That remains very unclear. The president didn’t slap these tariffs on week one, revealing they may have dropped as a symbolic priority for him. That opens up some room to maneuver to negotiate until the Feb. 1 deadline, and now there is even further hope for exceptions. The president has also asked for a report on trade and unfair practices to be delivered to him by April 1, which offers yet another potential delay in the tariff war. There will be lobbying, networking, and a full-bore strategy to give Canada some kind of carveout.
Still, neither date removes the possibility of the promised tariffs happening at some level. The president needs revenue, and tariffs are his preferred tool, despite the math.
Will Canada retaliate dollar for dollar?
Yes. The same strategy Canada deployed in Trump 1.0 during the steel and aluminum tariffs will be deployed again, and the list amounting to CA$37 billion worth of goods — including things like Florida Orange juice — is already made and ready to be deployed. After all, if Trump goes through with the tariffs, Canada could get pushed into a recession, with up to 5% of its GDP hit. While goods and services in both countries will get more expensive for citizens, it will hurt Canada much more for one reason: Canada sends almost three-quarters of its exports to the US, compared to just a little more than 17% of US exports crossing the other way.
If there are 25% tariffs across the board, will Canada use the nuclear option and try to cut off energy exports to the US, risking a full national unity crisis?
Very unclear. All the premiers and territory leaders met this week with Justin Trudeau to align their retaliation strategy, which includes energy … except for Alberta Premier Danielle Smith, for whom any inclusion of fossil fuel exports in a trade war is strictly off-limits. This is the lifeblood of the Alberta economy, after all, and she is protective of her province. However, her position deeply hampers a united Canadian response and allows the new US administration to deploy a divide-and-conquer strategy, knowing they can absorb any trade shocks better than Canada, especially if they do not include energy.
Is Trump still serious about taking over Canada by economic force?
Unclear. That view has certainly created a surge of patriotism in Canada and escalated tough trade talk as politicians jockey to wear the “Captain Canada” label. But if there is a desire to have an integrated North American economy — newsflash! — we already have one.
Energy alone is the best example. The US imports 24% of its crude oil from Canada, and that is very hard to replace because US refineries are retooled to process Canadian heavy crude oil, not the kind of oil the US extracts from fracking. Not only that, when looking at all energy products that flow across the border, like natural gas, there is a combined network of pipelines in North America that is over 281,000 miles long! With the free trade agreement, integrated fossil fuel pipelines, and hydroelectric systems in the East supplying electricity to the Northeastern states, it would be hard to find two more interconnected economies anywhere in the world.
In other words, on Feb. 1, the US and Canada are headed for a trade war they don’t need over a prize they both already have.