Jeff Mahon is director of geopolitical and international business advisory at consulting firm StrategyCorp. He previously served as deputy director at Global Affairs Canada’s China Division.
This essay is part of the Prosperity’s Path series. In a time of geopolitical instability and a shifting world order, the challenges facing Canada’s economy have only gotten more visible, numerous and intense. This series brings solutions.
U.S. President Donald Trump’s Saturday threat of 100 per cent tariffs will likely not come to pass. He had threatened such tariffs “if Canada makes a deal with China” – and that’s a big if.
Mr. Trump’s hypothetical “if” suggests he was not referring to any of the agreements Prime Minister Mark Carney had already struck with China. Was Mr. Trump talking about some future free-trade deal? Dominic LeBlanc, minister for Canada-U.S. Trade, said in response, “There is no pursuit of a free trade deal with China.”
Still, Mr. Trump’s words must be taken seriously. The spark for the new tariff threat might well have been trivial: Mr. Carney’s speech at the Davos World Economic Forum, an eloquent and biting disapprobation of U.S. policy, captured the zeitgeist and made people like the Prime Minister more than Mr. Trump – and that was evidently not okay. But whatever the spark, the kindling had long been laid.
The context behind Mr. Trump’s Saturday threat is easy to see. Mr. Trump’s National Security Strategy, released in December, with its harking back to the neo-imperialist Monroe Doctrine, made it clear that the U.S. sees the Western Hemisphere as its sphere of influence. In Mr. Trump’s view, the United States simply cannot allow a vassal such as Canada to repudiate core American interests and get too close to China.
At the same time U.S. tariffs and the accompanying market uncertainty are weighing on Canada’s economy. While exports to non-U.S. markets have increased – and Mr. Carney is making a valiant effort to increase them further – they’re not at levels needed to fill the gap of lost U.S. demand and restore investor confidence. A weakened economy is Canada’s gravest threat, not least because it also breeds political instability.
The current circumstance, with our economy so hurting and Mr. Trump feeling so aggrieved, therefore requires that we swallow our pride, play to his ego and find the zone of compromise. This requires striking a delicate balance between maintaining Canadian autonomy and preserving the U.S. market access that many Canadian industries rely on.
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The task is difficult, because unfortunately, these two goals are in obvious tension.
The U.S. has signalled its intention to incorporate economic security into the United States-Mexico-Canada Agreement as part of the upcoming review. This is in line with the trade deals the U.S. has struck with Malaysia and Cambodia. The challenge is that the nature of an economic security regime marries foreign, security, and economic policy. Should USMCA include provisions that institutionalize Canada’s subordination in these domains, we’d effectively turn into a special administrative region of the United States – a Canadian Hong Kong.
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Canadian and American flags fly near the Ambassador Bridge at the Canada/USA border crossing in Windsor, Ont. Though President Trump’s new 100 per cent tariff threat likely won’t come to pass, existing U.S. tariffs and the accompanying market uncertainty are weighing on Canada’s economy and straining trade relations.Rob Gurdebeke/The Canadian Press
We must firmly resist such loss of sovereignty. But Canada can’t avoid engaging the U.S. on economic security. We need to give up the fiction that trade can be separated from geopolitics and shed the Canadian exceptionalism deluding us into believing we can avoid it.
The good thing is that Canada has something going for it: Tariffs would wreak havoc on the U.S. economy and force Mr. Trump to back peddle. Mr. Trump is unlikely to completely overturn the direction of his flagship economic program – a program he believes is working. Rather, he’s more likely adjust the scope of his tariffs should it run into political obstacles.
Indeed, this is already happening. Mr. Trump can point to increased government revenues, new investments and stock market gains, but O.G. economic security – an individual’s ability to procure basic necessities – is coming back to haunt him. Prices are up, wages remain stagnant, and layoffs are looming. Affordability issues threaten to unravel the tariff program, so Mr. Trump quietly rolled back some measures one Friday evening in November.
This newfound sensitivity to affordability provides an opening for Canada to frame normalizing trade with Canada as a way for Mr. Trump to claim victory.
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U.S. President Donald Trump talks to media during the World Economic Forum in Davos on Thursday. Mr. Trump, who previously did not express opposition to Canada’s talks with China during Mr. Carney’s trip to Beijing, has now shifted his position.Markus Schreiber/The Associated Press
Offering Mr. Trump a political win requires swallowing our pride. Mr. Carney, try as he might to find new export markets and inspire co-operation amongst middle powers, might want to avoid a repeat of Davos, where he brandished his efforts so in Mr. Trump’s face.
Remember, those who’ve found success in dealing with Mr. Trump have done so by playing to his gargantuan ego. Canada must deploy strategic empathy and political theatre to meet the administration where it’s at.
Mexico figured this out and won the accolades of U.S. Trade Representative Jamieson Greer during his recent report to Congress on USMCA, where he acknowledged a dozen steps Mexico has taken to meet U.S. interests in areas that cover “not only trade, but border and national security.” Importantly, Mr. Greer noted that resolving these issues ahead of the upcoming USMCA review would enable both the U.S. and Mexico to “to put their best foot forward.”
Canada should follow Mexico’s lead and offer Trump a splashy deal that promises to address longstanding but minor grievances and reiterate promises of investment. More importantly, Canada can and must offer the U.S. an economic security policy win.
Canada should propose a selective customs union limited to a few industries of greatest concern to the U.S., such as steel, aluminum, and automotives. Relevant imports to Canada would be subjected to measures aligned with the United States’, either a tariff or other restrictive measures. In exchange, Canadian products in those sectors must have unimpeded access to the U.S.
This is in line with the United States’ economic-security thinking – and, more importantly, is also beneficial to this country. These are sectors where Canada has no plausible alternative export markets.
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Prime Minister Mark Carney meets with President of China Xi Jinping at the Great Hall of the People in Beijing, on Jan. 16. Canada has broken with the U.S. by agreeing to allow nearly 50,000 Chinese-made EVs into Canada at a low tariff, instead of the 100 per cent tariff Ottawa imposed on these imports in 2024.Sean Kilpatrick/Reuters
On the surface, such a customs union presents an issue for our Chinese trade relations. Canada has, after all, broken with the United States in lifting 100 per cent auto tariffs on China, which it cannot now walk back. But Canada’s lifting of tariffs on Chinese electric vehicles is limited, maxing out at 70,000 cars per year, under 4 per cent of the annual number sold domestically.
Canada should go no further in lifting tariffs on Chinese cars and also guarantee that those Chinese cars already let in never make it into the American market. This should be an acceptable outcome to the Americans.
Moreover, the more important part of the accord reached in Beijing last week is the shift in focus from trade to investment. Canada would welcome Chinese money more so than products. And this investment will be subject to conditions that restrict where and how China plays in the Canadian economy. This new approach to China – in great irony given Mr. Trump’s threats – can actually serve American interests. It creates a test case to try to manage the very Chinese overcapacity concerns that U.S. economic security policy seeks to address.
This is how Canada should frame its new Chinese strategy to Mr. Trump. If it works, it can be replicated by Mr. Trump to create a new modus vivendi for China relations. The great President can claim yet another victory.
Ultimately, we must keep in mind that recalcitrance is a losing strategy. Compromise is about finding a path forward where both sides see their interests reflected, and that is what Canada must seek.
Prosperity’s Path
