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Trade war may push Canada closer to its threatening ally
When Canadian defense expert Philippe Lagassé met with American counterparts in Washington this week, he quickly sensed they had not registered that the mood had shifted in Canada.
“There’s still a lot of emphasis on partnership,” he said. “We should be working together. We should be doing some things together.”
But Lagassé, an associate professor at Ottawa’s Carleton University, had to tell them that things had changed. “That’s hard right now because, politically, that’s just become a lot more difficult.”
Canadians were so angered by Donald Trump’s tariffs and annexation threats that they yanked American bourbon from liquor stores and turned up their noses at American produce. The typically staid hockey fans of Ottawa even booed the US national anthem.
Canadians, who are used to thinking of the Americans as friendly neighbors, are suddenly seeing them as a threat to their sovereignty. A poll this week shows 80% of Canadians support using oil as a weapon in the trade dispute, which would be a dramatic escalation. On Monday, Trump called off the planned 25% tariffs after Justin Trudeau agreed to take measures on the border, but the pause is for just 30 days.
Rattled Canadians are suddenly more committed to enhancing their sovereignty by reducing internal trade barriers, diversifying international trade so the country is less dependent on the United States, and beefing up the military.
Long a NATO laggard
It will need a lot of beef. For decades, Canada has sheltered under the coattails of Uncle Sam.
With oceans on both sides, an impassable ice cap to the north and friendly Americans to the south, there was little public support for military spending and lots of support for spending money on social programs. Even tough-talking Conservative Stephen Harper did little to boost defense spending. Canada is a NATO laggard, spending only 1.37% of GDP on defense — the average across NATO members is 2.71% of GDP — something Barack Obama, Joe Biden, and Trump have all complained about. Last year, leaked documents showed that Trudeau told NATO that Canada had no plan to get to 2%, the level all NATO countries have agreed on.
When political circumstances changed, Trudeau laid out a plan to get to 2%, but years of neglect will take time to turn around. Due to recruiting problems, there are only 63,000 people in the Canadian Armed Forces — well below the 71,500 it is supposed to have. Even at full strength, it is tiny compared with the 2 million troops south of the border. To make matters worse, three-quarters of Canadian soldiers are either overweight or obese.
Canada has summoned the will, finally, to spend on defense. Trudeau has promised to reach 2% by 2032. His likely successor, Mark Carney, said Wednesday he would aim for 2030. The defense minister has said we could get there within two years, although quickly rearming would pose logistical challenges.
But it is not clear if Canada's big push will be in partnership with its newly hostile neighbors. After all, if the United States decides to put tariffs on all Canadian exports, driving the country into a deep recession, would Canada want to proceed with the CA$70-billion purchase of 88 F-35A US fighter jets? Or would Ottawa cancel the order and buy fighters from Sweden, which has never threatened annexation? And if Canada’s economy is in free fall, could it afford to buy either?
Pentagon control
And should Canada buy kit from a hostile power? Canada’s military technology is integrated with America’s, so any operations without US approval would be complicated. The F-35 can’t function without its autonomic logistics information system, which is controlled by the Pentagon, which could limit its effectiveness in a showdown with America.
There may be pressure, therefore, to work more closely with other countries — to buy equipment from the Europeans, for example — although the natural inclination of the defense community in Ottawa is to stick with the Americans, whom they see as their friendly big brothers.
“I think there’s going to be a pretty heavy emphasis on the fact that you take Trump at his word, so you buy more American equipment, and you invest more in the US,” says Lagassé. “You try to integrate yourself more deeply into those supply chains, and that’s how you protect yourself. The other side is going to argue, well, now this is too vulnerable. We should try to become less dependent, take a step back.”
Not a lot of choices
But Canadians are limited in their options, says Graeme Thompson, an analyst with Eurasia Group, because at the forefront of military innovation with AI and advanced computing, there are only two real options: China and the US.
“There’s the Chinese ecosystem and there’s the American ecosystem, and basically Canada doesn’t have a choice there. It’s not going to be able to develop its own autonomous tech ecosystem or supply chains. It has to be plugged into the US side of things. There’s a great line, I don’t know who said it, but ‘the US is our best friend, whether we like it or not.’”
Canadians may want their government to do more to assert national sovereignty, but Lagassé doubts that sentiment is strong enough to disrupt the close military cooperation between Canada and the United States.
“The public may want us to do something differently, but … is the public willing to sustain the cost? Is the public’s attention going to be sufficiently focused so that political leaders see gain in pursuing that? Or does it just kind of evaporate once the tariff threat is no longer present?”
Once tempers cool, Canadian politicians will continue to use procurement deals as a way of currying favor with the Americans rather than a way of asserting independence. After all, they are Canada’s best friends, whether they like it or not.
Canada's Prime Minister Justin Trudeau is joined by Finance Minister Dominic LeBlanc, Minister of Foreign Affairs Melanie Joly, and Minister of Public Safety David McGuinty, as he responds to President Donald Trump's orders to impose 25% tariffs on Canadian imports, in Ottawa, Ontario, on Feb. 1, 2025.
Trump ignites trade war. Will there be a legal response?
On Saturday, US President Donald Trump signed an executive order applying 25% tariffs on all Canadian and Mexican imports, excluding Canadian energy, which will be tariffed at 10%. The order, which takes effect on Tuesday, also imposes a 10% tariff on all Chinese imports. Trump threatened to escalate tariffs further if any of the countries retaliated, which Mexico and Canada have already done.
Canada will apply 25% tariffs on $155 billion of American goods, from orange juice to appliances to car parts, phased in over three weeks. Ottawa will also consider nontariff measures relating to energy and procurement, and provincial liquor monopolies areremoving American alcohol from their shelves. Mexican President Claudia Sheinbaum also retaliated with “tariff and non-tariff measures in defense of Mexico's interests,” without specifying the rate.
China has responded with plans to implement “countermeasures” and called Trump’s tariffs a “serious violation” of international trade rules, which it will contest before the World Trade Organization.
On what basis did Trump issue the order? Trump expanded the scope of the national emergency he declared on Jan. 20 at the southern border of the United States, due to “the sustained influx of illicit opioids and other drugs” that is “endangering lives and putting a severe strain on our healthcare system, public services, and communities.” It now covers both Canada and China, which he accuses of not doing enough to combat fentanyl production, money laundering, drug gangs, and transnational crime.
Could legal challenges derail Trump’s tariffs? To declare this emergency, Trump invoked the US International Emergency Economic Powers Act, or IEEPA, the National Emergencies Act, or NEA, as well as sections 604 of the Trade Act of 1974 and section 301 of Title 3, United States Code.
But the IEEPA hasnever been used to justify tariffs. It allows for the imposition of sanctions, suchas those imposed by the Biden administration against Russia, which can be invoked immediately. Trump chose the IEEPA because it allowed him to bypass the lengthy investigations and consultations required by other trade laws he invoked during his first term.
It also allows him to claim the tariffs are legal under World Trade Organization rules, as the General Agreement on Tariffs and Trade’s Article XXI designates a national security exception. President Richard Nixon similarly invoked the Trading with the Enemy Act to impose 10% tariffs after the US quit the gold standard in 1971 to stave off a balance-of-payments crisis.
This may not bode well for a challenge by China before the WTO. But if American courts rule against Trump on his use of the IEEPA, his emergency declaration could be considered invalid, opening the door to penalties under global trade rules.
Finally, there’s the USMCA. A Congressional analysis found that tariffs would violate the tripartite treaty, but with Trump already threatening to withdraw from the agreement, it would appear he does not care. Trump said on Truth Social on Sunday that Americans will feel “SOME PAIN” but that “IT WILL ALL BE WORTH THE PRICE THAT MUST BE PAID.”
We’ll be watching to see who might challenge the US president in court – and whether they succeed. Meanwhile, the markets were taking a hit as of early Monday with stock futures lower and the dollar and oil rising.
Six issues that will shape US-Canada relations in 2025
In December, Justin Trudeauwarned that dealing with President-elect Donald Trump would be “a little more challenging” than last time around.
With Trump threatening massive tariffs that would hit Canada hard, taking aim at the country’s anemic defense spending, criticizing its border policy, eyeing its fresh water, and more, 2025 will indeed be a rocky time for US-Canada relations. But Trudeau might not be around for much of it. Down in the polls and facing calls from a majority of his caucus to resign, Trudeau is mulling his future and could resign any day.
Conservative Party leader Pierre Poilievreis heavily favored to win the upcoming federal election, which would make Trump his challenge – a challenge Canadians, in fact, prefer the Conservative leader take on over his Liberal opponent.
Whoever leads Canada in the months to come, these are the top US-Canada issues they’ll be focused on:
1. Trade and tariffs
Trade between the US and Canada is worth over $900 billion a year, so the exchange of goods and services will be a top issue regardless of who’s in office. But Trump’s threat to levy a 25% tariff on imports has taken it to another level. The tariffs would raise prices in the US and hit Canadian industry, particularly the energy, automotive, and manufacturing sectors, with added costs. The Canadian Chamber of Commerce predicts the tariffs, and Canadian retaliation, would cost Canada roughly CA$78 billion – 2.6% of its GDP – a year and lead to recession. Canadian exports to the US would plummet, says the Chamber, with a predicted 60% drop in the mining and quarrying industries, 39% in m0tor vehicles, and 27% in metals – which would be costly for both countries. Ontario, the country’s most populous province and home to its auto sector, would be hit especially hard – which is why Premier Doug Ford is threatening to stop energy exports to the US if Trump proceeds with his plan.
The economic harm to Canada would be exacerbated by the fact that Ottawa would likely respond with its own retaliatory duties. The Trudeau government is working to secure an exemption from the policy for Canada but hasn’t managed to yet. But energy experts say they expect the tariffs won’t apply to Canadian oil either way.
Graeme Thompson, a senior analyst with Eurasia Group’s global macro-geopolitics practice, says Trump’s tariff threat is real but also part of the incoming president’s strategy. He’s trying to gain concessions on issues of concern, including border security and the (very limited) flow of fentanyl from north to south, and the US trade deficit with Canada ahead of the looming renegotiation of the USMCA.
Thompson notes that Canada is in a weak bargaining position given that it’s utterly dependent on its trade relationship with the US, “and for that reason, doesn’t have a lot of cards to play.” He also expects that even if Canada does secure an exemption on tariffs, Trump will be prepared to threaten them again in the future as leverage in any given negotiation.
“This is not a one-and-done,” Thompson says. “I think this is a mode of operations that will repeat several times for the next four years over a variety of issues.”
2. A (metaphorical?) border wall
Trump has made border security central to his tariff threat, arguing that the flow of fentanyl and illegal immigrants across the border poses a public safety threat to the US. Canada is already developing a border security plan to respond to Trump’s concerns. It’s also scrambling to prepare for a possible rise in asylum claims – which will exacerbate the current backlog – and irregular border crossings if Trump goes ahead with his plan for mass deportations.
Canada was already revising its immigration policy before Trump won, but it may introduce further restrictions – and continue to toughen its rhetoric – in the coming months. After Trump’s win, Immigration Minister Marc Miller said “not everyone is welcome” to go to Canada, emphasizing that his government was ready to work with the Trump administration on border security. At the same time, Foreign Affairs Minister Melanie Joly said Canada was sticking to its new immigration plan, which would see fewer newcomers admitted to the country.
The Trudeau government reduced its immigration targets in October and cut the number of international students it welcomes. Its border security plan includes CA$1.3 billion in spending around five pillars that include a commitment to “detecting and disrupting the fentanyl trade” and “minimizing unnecessary border volumes,” including an end to flagpoling – or allowing temporary residents to leave the country (typically to the US) and return immediately to access immigration services at the border. But that may not be enough.
Thompson says leaders of the current government are “overestimating their ability to manage what is coming.” He notes future demands from Trump could include “tighter screening of regular immigrants into Canada. That means that much like with tariffs, the Canadian government may end up managing cascading demands from Trump, so no single promise or plan will likely be sufficient to placate the incoming US president.
3. Defense spending and securing the Arctic
US administrations, including Biden’s, have pressured Canada to increase its defense spending and hit NATO’s 2% of GDP target for years. In April, the Trudeau government outlined a plan to boost spending, focused in large part on building armed forces capacity in the Arctic. The new initiatives total roughly CA$81 billion over two decades and will push the country toward 1.76% of GDP by 2030. In December, the government announced a further adjustment to its Arctic presence, which will include more air and naval equipment, and a renewed cooperation strategy in the region with the US in the face of Russian and Chinese regional interests.
So far, Trump administration officials and other Republicans seem unimpressed with Canada’s defense plan. Former Trump ambassador to Canada, Kelly Craft, said the country could “do better.” That means spending more – and faster – especially since Trump has reportedly considered asking NATO allies to spend a whopping 5% of GDP on defense spending. He’s also threatened to leave countries that fail to spend more to fend for themselves against foreign aggression.
Philippe Lagassé, associate professor and Barton Chair at the Norman Paterson School of International Affairs at Carleton University, says Canada could raise military spending by increasing pay, boosting operations expenditures, and contracting more for services. He says procurement of military hardware would take longer. But in the face of financial constraints, such new spending would require raising taxes, growing the deficit, cutting other programs, or some combination of the three – which could prove a challenge for the current government or its eventual replacement.
Arctic defense may prove to be a smoother issue. “The US has been trying to get Canada to do more in the region for a while,” Lagassé says, “and we've responded to that. I don’t see that as a point of tension.”
“If anything,” he adds, “the US will be glad if we just get our act together because their sovereignty considerations up there are less than ours, and they have capabilities up there that we don’t, but they do want us to actually get our act together around it.”
So, while Canada may feel the pressure on defense spending – and may need to come up with a faster, heftier plan to placate Trump, it can always point to progress in the Arctic and is likely to do so.
4. Water, water everywhere?
In September, Trump floated an idea to solve California’s drought problems: import water from British Columbia. As Trump put it, the province has “a very large faucet” that, once turned, could supply drought-stricken US states with fresh water. Experts point out that Canada doesn’t, in fact, have water to spare, and Canada can’t just turn on a “faucet” to divert water to the US.
The water Trump referred to, coming from the Columbia River, is already spoken for, in part through an existing treaty between the US and Canada – the Columbia River Treaty, which sets out rules governing flood controls, dams, and hydroelectric power generation.
That arrangement is in the process of being modernized to account for new developments, including climate change. The Biden administration and the Trudeau government recently reached an agreement in principle after years of work that began during the first Trump administration. But this time around, should Trump decide to maintain an interest in water flows north to south, the terms of the treaty could – like free trade – come back up for negotiation, with the faucet on the table.
5. Critical minerals. It’s in the name
The US and Canada share several other areas of cooperation and competition, but one is of immediate interest that could incentivize working together. Both countries are spending big on critical mineral development, including co-investments in a development in Yukon.
Critical minerals are central to cellular phones, the electric vehicle industry – in which both the US and Canada are investing heavily – and national defense. So whatever other tensions shape US-Canada relations, cooperation on critical minerals will remain a shared goal, especially as the two countries look to rival Chinese and Russian interests in related sectors.
6. Setting limits on Big Tech
Both countries are also taking on big tech giants, such as Google, through anti-monopoly investigations lawsuits. Still, the US is pushing Canada to drop its 3% digital services tax on big tech companies, including Google’s parent company Alphabet. The Biden administration requested a dispute resolution process for the tax, claiming it unfairly targets big US tech firms. The Trump administration is likely to press the issue, too, which may leave the policy as a pawn in one set of negotiations – say, over tariffs – or another.
Does Canada have any leverage to rely on? Canada has some cards to play against Trump, but it’s not clear who’ll be playing them. The Trudeau government, down roughly 25 points in the polls, is not long for this world – and Trudeau himself may resign any day. The country is due for an election by the fall, but it could come much earlier.
Regardless of who’s in power, however, they’ll likely deploy the playbook from the last time Canada had to manage its relationship with Trump. That means working contacts in states, particularly border states in which the Republicans have an interest in winning or currently govern and contacts in Washington. Then, they work the message about Canadian, and shared, interests up to Trump. There’s also the threats of retaliatory tariffs and halting certain trade, like Ford’s threat to cut off energy to border states.
Together, pulling these levers may yield some results, but Canada is in for tough negotiations and is unlikely to emerge from them unscathed.
Liberals face two showdowns to Trump-proof Canada
As if Justin Trudeau isn’t dealing with enough. His Liberal Party is down in the polls and struggling amid a House of Commons shutdown led by the Conservatives. Now it has to manage an incoming Trump administration intent on extracting as much as it can from Canada.
After nearly 10 years in power, the Liberals are politically weak, and they’re staring down another potential parliamentary showdown over what to do about Donald Trump. Last time, it was overTrump’s 2018 tariffs on Canadian steel and aluminum imports. This time, it’s likely to be about the president-elect's latest tariff threat and border security politics.
What the tariff man wants vs. Canada’s choices
Trumprecentlyannounced an intended tariff policy that made Canadian leaders blanch: 25% across the board — levies that would cripple Canada’s economy. The tariff hike wasn’t a surprise, considering Trump campaigned on it, but the 25% rate was a shock, and the inclusion of Canada disabused optimistic Canadians of any hope that a long, close trade and security relationship between the countries would mean preferential treatment.
The president-elect has said Canada would pay the high tariffs “until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!” So Trump has laid out his ground rules, but responding to his demands will be tough.
For one thing, the US Drug Enforcement Agency says that while Canada’s border was a fentanyl threat a decade ago, it’s no longer a core part of the drug-poisoning crisis. Mexico poses a bigger threat — almost 500 times more fentanyl was seized by US Border Patrol coming from Mexico than Canada in 2023.
Still, border crossings are up. Encounters between irregular migrants and authorities along the US-Canadian border in 2023 account for just a fraction of the 1.5 million along the US-Mexico border, but the Canadian numbers are higher than ever. Along the northern land border — the world’s longest at 5,525 miles — border patrol reported 189,000 encounters last year, a 73% uptick from the year before — and nearly 600% higher than in 2021.
The Liberal government has promised to be “very visible” on border policy in response to Trump, adding more staff and equipment, including additional helicopters and drones to monitor the frontier. It is also pledging additional resources for the Royal Canadian Mounted Police aimed at curbing human smuggling across the border. They’ve also launched an online ad campaign — in 11 languages — to dissuade refugees from making asylum claims in Canada.
The Mounties, in turn, plan to send more police to the border if necessary, largely in response to Trump’s plan for mass deportations, which it expects will lead to a surge in illegal crossings. The exact number of pledged Mounties is unclear, though the increase could involve sending cadets to the border. The Canada Border Services Agency says it would need up to 3,000 more officers to manage its share of increased border activity.
Border security poses domestic challenges for Trudeau
Any new Canadian border security plan will cost money the government must come up with as part of its budget in early spring. Since the Liberals rely on support in a minority parliament, they require support from opposition parties to pass legislation.
At least one province isn’t waiting around for Trudeau. Alberta is working on its own border plan, which may include a special sheriff unit to patrol the crossing between it and Montana. But the bulk of any plan will come from Ottawa.
While he can’t implement policy, Conservative Leader Pierre Poilievre — whose side leads the Liberals by 20 points in the polls — can cajole and pile more political pressure on Trudeau. Poilievre’s podium sign during a recent speech read: “Fix the broken border,” and he’s calling for a plan to be presented to Parliament by the Liberals that includes more border patrols, stricter visa rules, a cap on how many asylum-seekers the country accepts, and more.
Trudeau met with opposition leaders on Tuesday to discuss border security and the tariff threat, but Poilievre has political reasons to keep calling it “Trudeau's broken border.” After all, the Conservatives, if their polling holds, are set to replace the Liberals, and the country is due to vote by October 2025.
To pass legislation in the meantime — including the crucial budget Trudeau needs to tighten border controls and keep Trump’s tariffs at bay — the Liberals must win the support of another party in the House of Commons, most likely the NDP, if anyone.
In theory, Poilievre might back a robust Liberal border plan, which Conservatives would claim as their own. But it may be more likely that they’ll reject whatever the Liberals come up with as insufficient and wait to present their own plan if they form a government after the next election.
The Conservatives won’t hand Trudeau a win, says Graeme Thompson, a senior analyst with Eurasia Group’s global macro-geopolitics practice, and will likely respond to the Liberals’ border plan with: “Great, but it’s too late and not enough.” So they’d “vote against it for being too spendthrift and for not doing enough on security and defense.”
That would leave Trudeau with two choices for a partner: the Bloc Quebecois, who are also set on defeating the Liberal government, or the New Democratic Party, who are taking things one day — and one vote — at a time. So far, on the border, the NDP is calling on the government to hire 1,100 new border agents and to expand the agency’s powers.
Thompson says the left-wing Bloc and NDP “might not be the most excited about okaying massive expenditures on border security.”
For the NDP to vote against the Liberals, they’d likely have “to find the budget insufficiently generous when it comes to economic and social supports for Canadians,” Thompson says. But if they simply say the Liberals have gone too far on border and defense spending? “Then suddenly you’re in a situation where the Liberals have lost both flanks, and that could be a trigger for an election,” he adds.
Such a border security showdown could lead to an early election, says Thompson, as the Liberals try to navigate competing demands from Trump and opposition parties at home.
Could a new government fare better?
Should the Conservatives replace the Liberals in 2025, the changing of the guard may give Canada a stronger negotiating position vis-à-vis Trump. Poilievre’s Conservatives, for example, could scrap Liberal policies such as the Online Streaming Act and the digital services tax that irk the US, giving them leverage in negotiations with Trump.
Meanwhile, Trudeau’s ability to navigate tense US-Canada relations could determine his political fate and Canada’s economic future.