Trending Now
We have updated our Privacy Policy and Terms of Use for Eurasia Group and its affiliates, including GZERO Media, to clarify the types of data we collect, how we collect it, how we use data and with whom we share data. By using our website you consent to our Terms and Conditions and Privacy Policy, including the transfer of your personal data to the United States from your country of residence, and our use of cookies described in our Cookie Policy.
{{ subpage.title }}
Can Canada quit the United States?
On Monday, President Donald Trump promised to hit Canada and other countries with 25% tariffs on steel and aluminum. The tax is set to come into effect on March 12, the same day Trump’s 30-day pause on across-the-board tariffs against Canada lifts.
As the US’ biggest source of aluminum and one of its top sources of steel, Canada stands to be hurt more than any other country by the president’s new metals tariffs. Prime Minister Justin Trudeau and his government are rushing to find ways to wriggle out from under the tariffs, but a national discussion is also underway to find ways to diversify the country’s trade relationships and to protect the economy from what’s seen as an increasingly unreliable partner: the United States.
To get a sense of what Canada could do to fight back against US tariffs, while developing a long-term plan to build economic resilience, GZERO’s David Moscrop spoke to economist Kevin Milligan, director of the Vancouver School of Economics at the University of British Columbia. This interview has been edited for length and clarity.
David Moscrop: How productive would Canadian counter-tariffs be against the US?
Kevin Milligan: The US economy is 10 times the size of ours. I've heard politicians and some others talking about dollar-for-dollar retaliation. The problem with that is our dollars don’t go very far when we put tariffs on their goods. To give an example, imagine we were to do one of the products that Canada loves to think about, like Harley-Davidson motorcycles from Wisconsin. Imagine we put a big tariff on them, and the sales to Canada dropped by half. What share of Harley-Davidson’s business overall comes from sales to Canada? Like 5% or something like that? Maybe, maybe 10%. So they’re losing a couple of percent off of their overall sales. They’re not going to be happy, but it’s not going to devastate them. In contrast, there are many businesses in Canada that sell almost everything they make to the US. When they’re faced with a big tariff, they will lose substantial sales, and it’s not going to be a couple of points off the top. It’s going to be existential to them. So that’s where the magnitude is different.
When we tariff US goods coming into Canada, that means that the cost of those goods coming into Canada goes up for Canadian consumers. And so we will be putting taxes on ourselves to make a small change to Harley-Davidson or whatever we tariff. So that’s where the counter-tariff is not something that I think will be super effective. It’s not to say we don’t do it. We have to strike back. This is an attack on our sovereignty, on our economy, and so we have to strike back and strike back hard. I’m just not sure that broad counter-tariffs are the way to go.
What about something like export controls on critical minerals or energy?
This is most easily understood in the context of oil. I’m not suggesting we do it for oil — there are a lot of political tensions within Canada when it comes to oil — but it is very tangible to think about this. Imagine the oil industry got together with the government and agreed that we’d purposely throttle both production and exports to the US. So, instead of 100 barrels a day, we’re now going to export only 50 barrels a day. If we did that, what happens? There are fewer barrels, and there are lots of people bidding for them, so the price goes up. The government doesn’t get the revenue. The industry keeps the revenue. They’re going to get less than they would’ve if they sold the full 100 barrels, but the revenue goes directly to the producers, which is better than washing it through a government program.
So you don’t have to worry about export taxes or anything else. You just do a curtailment in conjunction with the industry — though the government may have to organize that — but that just keeps the revenue in Canada by shrinking the amount of oil we export.
Trump’s threats have Canada talking about removing barriers that keep goods from flowing east to west within Canada. But breaking down internal trade barriers, primarily regulatory barriers, is tougher than people think. What are those barriers, and why are they so persistent?
There has been a lot of talk now and before, but especially now, on interprovincial barriers to trade. These aren’t like tariffs where if you buy something from Saskatchewan and you’re in Alberta, you have to pay some big tax. These are mostly regulations. And the thing about regulations is it’s kind of hard to tell sometimes which are really important regulations that keep us safe and which ones are designed for feather-bedding for some interest group.
When you dig in, what does it mean to have uniform standards across the country? The thing is that provinces are different. There’s a reason we have different regulations and different provinces. In British Columbia, we have these mountain highways where it really matters if you have snow tires. It really matters if your truck is too long and can’t snake through a mountain pass. In contrast, if you are from Saskatchewan or PEI carting a big load of potatoes, it’s a different set of regulations you need to worry about. Can you clean the truck so the potato worm doesn’t get in or out of a province? That’s a big deal In PEI, but it’s maybe less of a deal in other provinces.
One way to go forward on that is to have a mutual recognition system that if you’re licensed in one province, then other provinces will recognize that. So there’s kind of like a minimum standard that everyone has to meet. And then if a province wants to have special rules for mountain highways or potato bugs, you can do that. The challenge there is defining that minimum standard, which means 10 provincial governments, maybe three territorial governments, and the federal government all sitting around and figuring out what the minimum national standards need to be for tire size and snow chains.
What about external trade diversification? It’s easy to talk about more trade with Europe, South America, or China. It’s harder to do it. Why doesn’t Canada trade more with countries other than the US?
There are a couple of reasons for this. One is that economists have something we call the gravity model of trade, where the geographic distance between countries is a really good predictor of who trades with whom. One aspect of it is transportation costs. Another aspect of it is culture, language, legal similarities, and things like that. Personal ties. It makes it easier to trade when you have kinds of business contacts that are easier to make — when there are cultural, linguistic, and personal ties.
Thinking tangibly, I mean, we are not building a pipeline to Italy for oil, right? We’re building it to Cushing, Oklahoma, where they trade all the oil. That’s a geography constraint. We can ship oil to the coast and put it on the ships, but that gets prohibitively expensive for providing oil to Italians versus wherever they might get it already, so that’s it. The trade costs are going to be a big reason for why our trade is the way it is.
If we want to diversify, I think it’s a good goal. We have an unreliable economic and political partner to the south of us. This is a big deal. This is a hugely important deal. We want to make sure that we decrease our reliance on them. I’m fully on board with that strategy, but we have to be a bit modest in what we think we can get out of that because, at the end of the day, our oil is almost surely going to be going to the US.
Are we so dependent on north-south trade that we just have to find a way to manage this relationship no matter what it might be?
I think that’s the core truth of this. We’re not putting up a big wall at the border and not trading with the US. That would be immiserating for us. What the president says I guess is true: They don’t literally need our oil, our cars, our software, or whatever we might want to trade with them; they can get along without it. But boy, they’d be paying a lot more for it from other sources. We can offer them cheaper stuff they can get elsewhere. At the end of the day, this is about managing what all of this looks like going forward. We have to be extraordinarily wary of signed agreements and giving up stuff for a signature. I’m very wary of that because that signature has shown to be worth zero. This is an amazing choice that the American government is making and giving up all of its international credibility. But even nations at war will trade with each other because there’s just a fundamental economic logic that when something is way cheaper brought in from abroad, that just is better for everyone to allow those trades to happen.
Would a Canada-first industrial strategy be a non-trade measure we could consider?
It definitely could be. You can think about industrial strategy as, say, subsidizing a pipeline. That’s industrial strategy. We’ve had a battery strategy over the past few years for EVs. I’m not quite sure where that sits now, but these are big bets that we could take. I’d be most keen on ones that involve public infrastructure for export. That could be actual tangible infrastructure. It doesn’t necessarily mean pipelines. It might mean improving our ports and things like that. But also intangible infrastructure like our trade missions abroad, like export encouragement for services and electronic services and software and apps and all of those good things that are way easier to trade across borders that don’t really matter as much for geography.
How much, if any, of the Canadian strategy should be waiting Trump out, hoping that Americans feel the pain – like with steel and aluminum tariffs, which are going to be expensive for US consumers — and say, “OK, enough, we need to change this, drop the tariffs”? Or how much of this is about just waiting for someone better the next time around?
You can think of 2016 as an accident. I don’t know that we can think of electing Mr. Trump twice as an accident. I think this is a permanent state of affairs. I think we have to think about it that way. But an important element of your question is: “What strategy should we have?” I think that we should be upfront and ask whether we should do dollar-for-dollar tariffs. For those who support that, we need to ask, what is your strategy of action? What do you expect that to bring us? I don’t think it will bring people what they think. We need to think of strategies that will put pressure on the White House right now. I don’t think that is decreasing Harley-Davidson sales by 1%.
I think there are other measures we should look at. It can be trade measures. There are things that we have that are very rare in the US, that will mess up their production. Aluminum is one of them, and they just self-owned on that. Those are things we should focus on.
We should also be very open to nontariff barriers. What I mean by that is rather than throwing a tariff on US goods, which again could be part of the mix, we could talk about intellectual property reforms. I’ve heard people talk about not allowing US coal to be exported through BC. There are a ton of nontariff measures, regulatory measures, and other things we could do. There could be diplomatic measures. We could expel diplomats. I’ve seen people talk about not allowing the US ambassador to be sworn in. We could shut off electricity to New England for 24 hours.
Maybe some of these would work, and maybe some would not. But being creative and finding things that cause pain to the US is the point, while minimizing pain to us.
An important element of strategy here is to understand we are not in a regular old tit-for-tat trade war. Too many people are thinking of it on that small playing field. This is a much broader thing. Certainly, Mr. Trump thinks about it as a much broader thing, and I’m mystified that so many Canadian pundits — the Canadians themselves, I think, get it — are still thinking, “Oh, what tariffs should we put on them to counter their tariffs?” Tariffs are just a tactic in a broader strategy from Mr. Trump. It should be the same for us.
Graphic Truth: Trump tariffs could cook Canada
It’s not yet clear how he will follow through with that threat – mainstream economists have warned of its inflationary effects – but the president-elect and top advisers, including his former trade chiefRobert Lighthizer, are working hard on it as Trump prepares to take office in January.
What effect would a blanket tariff have on Canada, whose economy is tightly integrated with the US? Brace yourself. A recent report by the Canadian Chamber of Commerce estimated that a permanent 10% US tariff on Canada would cause US imports to fall by 10%, and knock as much as 5% off of Canada’s GDP.
Here’s a look at just how dependent Canada’s economy is on the US, and the key export categories.