North American Brief
Issue 23 | Feb. 2025

Trump’s tariffs-Canada’s response: Right questions, wrong answers

“There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.”

Milton Friedman, Capitalism and Freedom, 1962 

The Friedman quote sums up a major element of Canada’s evolving response to the, depending on one’s view, escalating or looming trade war with the U.S. A lot of good can come from this “let no crisis go to waste.” Desperately needed reforms that have proven “politically impossible” appear to becoming “politically (and economically) inevitable.”    

Unfortunately, this doctrine alone is not enough. What Canada faces with the U.S. is not an ordinary crisis. It is a crisis born of a fundamental restructuring of the political and economic reality in which the U.S. and, by extension, Canada operate. A pause to think of whatever previously unimaginable headline is running when you read this makes the point. Unless updated for the current reality, solutions created in and for a reality that no longer exists will be of limited use and may do more harm than good. And these solutions will not have an impact until the mid-to longer term when action is needed immediately.  

So, what to do?  

Below are but two concrete examples of an updated Friedman doctrine for our new reality. One is an example of taking something that’s been lying around and updating it to fit the moment, and the second example is picking up and discarding a policy that has been lying around. This exercise is but one example of how Canada needs to update the software that governs how it thinks about, and engages with, the U.S. 

1.  Internal trade – retool resources, not remove barriers 

Internal trade is an example of “what’s lying around” that needs to be adapted. Canada’s internal trade problem is a tyranny of small, minor scrapes and cuts that individually are of no real consequence but, in their accumulation, are a serious wound. Fixing each minor barrier will lift overall GDP figures and make the economy more resilient and more competitive but will not directly help businesses respond to the loss or diminishment of trade with the U.S. Creating more trade within Canada will do that, but there is no evidence or reason to believe that removing the remaining minor irritants will automatically and magically lead to more trade within Canada.  

If the goal is to create more trade within Canada, then policies that promote and facilitate internal trade are needed more than policies that remove the last few stubborn barriers. 

For a concrete example, take a small business in Lethbridge making a world class, highly competitive product. This business exports to Great Falls, Montana, a market 90 minutes away by car. How does this business shift to learn about, let alone access, opportunities in Quebec City, five hours away by plane? If the small Lethbridge business were looking for opportunities in Indonesia or Chile or even the U.S. or any foreign market where Canada has liberalized trade, the answer is simple and, for Canadians, obvious – turn to the municipal, provincial or federal trade commissioners.  

We have an overabundance of these resources because there is no expectation that signing a foreign trade agreement (or removing trade barriers) will magically lead to more trade. Additional work must be done. The same applies to trade within Canada. If the goal is to increase internal trade as a response to a more difficult and riskier U.S. market, then liberalization or removing minor barriers will not be enough; resources to increase trade will be needed.

Canada already has an abundance; we argue overabundance, of resources to facilitate external trade. These can be retooled and applied to promote internal trade, which is far cheaper, faster and more efficient than creating, organizing, staffing, training and operationalizing a whole new bureaucracy. Taking these steps now will build on the awareness and momentum of the current crisis. For those firms that want to diversify away from the U.S. without travelling half or even a quarter of the way around the planet, meaning the overwhelming majority of firms that trade with the U.S., this is an idea that makes sense, will have immediate impact and adapts existing work to fit the current reality.  

2. Stop thinking about foreign trade diversification as a, let alone the, solution  

Our current push for trade diversification from the U.S. market started 50 years ago, in 1971, which was the last time the U.S. imposed across-the-board tariffs on Canadian goods (yes, we’ve been here before). The crisis of the “Nixon shocks” tariffs resulted in a Royal Commission on Canada’s trade future and a resounding call for trade diversification. That consensus and prioritization on diversification from the U.S. market has been a keystone of Canadian trade policy orthodoxy ever since. Yet in the intervening half-century, trade with the U.S. as a percentage of overall trade has barely budged. Yes, Canada has increased trade elsewhere, but trade with the U.S. also increased and the dependency percentage has barely budged.  

Our diversification policy has been successful in growing trade but not in significantly reducing dependency on the U.S. 

 

The long, tortured history of the Canadian softwood lumber industry is an almost half-century-long object lesson on the futility of hoping that a crisis, or even a series of crises, in the U.S. market will drive Canadian firms to diversify to foreign markets. As difficult as the U.S. market may become, it will never be as difficult as a market halfway around the globe with a lower per capita GDP, different language and customs. Or, to offer a concrete example, as bad as the U.S. market may be, for smaller Canadian firms going to Honduras for twice the amount of work, half the profit and quadruple the risk is a larger risk than remaining in the U.S.  

In this case, pouring even more resources into arm-twisting or enticing Canadian firms to leave the U.S. will have marginal, if any, returns. Instead, putting increased resources to better help Canadian companies understand and adapt to the new realities of a radically different U.S. will help Canadian firms now and in the future. Putting even more resources into policies and initiatives that have clearly failed to reduce the dependency ratio on the U.S. will make matters worse. It will mean fewer resources to help firms adapt to the new reality, and it will create the false expectation that investments in further diversification away from the U.S. (and Canada) will help.   

3. Final note: Face up to the new reality of a new U.S. or keep repeating the mistakes that helped get us into the current mess 

Beyond helping firms understand and navigate the new U.S. reality, changing how the Canadian government, media and the foreign policy community understand the U.S. is a critical reset that is needed now. The changes in the U.S. are deeper than one individual and will endure well past the 208 weeks of an administration. When the current administration and America First Movement subside, the U.S. will not simply revert to what it was; something new will emerge that will require yet another major adjustment. The whiplash from one era to the next will likely be as serious as what we now experience. To survive the coming eras of tumultuous change requires a complete revision to the conventional wisdom and orthodoxy of past decades. It requires throwing the baby out with the bathwater and starting afresh, as we noted in the Financial Post recently.  

Analysis of these changes in the U.S. and how they impact Canada have been produced over the past five years and certainly more in the past six months, well before Trump took office for a second time. Our bewilderment and befuddlement at our second view of Trump’s trade policy is but one example of how divorced our understanding of the current U.S. is from reality.  

As Canada seeks to defend itself from a U.S. turned hostile and develop new frameworks for engagement, a guiding thought must be how much the U.S. has changed. To dream otherwise will prevent us from taking steps to make real, enduring change. 

Want more on the topic?

Carlo Dade, Director, Trade and Trade Infrastructure

The Western North America Brief is a compilation of stories and links on the United States and Mexico’s relationship with Canada’s Mountain West- prairie provinces focusing on stories and topics that are not always “on the front page” in national coverage.