Trump’s tariff threats and what to do about them

President-elect Donald Trump’s threat to impose a 25 per cent tariff on all imported products coming into the United States from Mexico and Canada has justifiably alarmed Canadian policymakers and business leaders. According to Trump’s announcement, the tariff would remain in effect until Canada and Mexico stop the flow of illegal drugs and illegal immigrants into the U.S. Canadian officials responded by saying that Canada places a high priority on border security. They also signalled the potential for a disruption to Canadian exports of oil and gas to damage U.S. domestic energy security (oil is the U.S.’s top import from Canada).

While Trump implemented tariffs on Canadian steel and aluminum during his first administration and used the threat of abandoning NAFTA to gain small concessions from Canada that were included in the USMCA (NAFTA’s replacement), the federal government is arguably still without a clear strategy to address Trump’s renewed threat to Canadian prosperity.

Canadian trade officials appear to be relying on lobbying U.S. politicians and business leaders to oppose any new trade barriers by the incoming Trump administration. This strategy arguably had some success during the first Trump administration, when President Trump threatened to pull the U.S. out of NAFTA. Canada was able to preserve all of the essential features of the existing bilateral trade arrangement in the USMCA.

However, the U.S. political scene is different now. The Republican Party holds majorities in both branches of Congress, and members of the incoming House and Senate are both more loyal to Trump and more populist in ideology than during Trump’s first administration. As well, key cabinet officials including Scott Bessant, Trump’s incoming treasury secretary, believe in the efficacy of tariffs to promote U.S. economic and political interests. In this context, Canadian lobbying efforts in the U.S. that were successful in preserving the status quo in the past are likely to be less successful going forward.

So, what’s to be done?

One possible tactic is for Canadian officials to encourage and assist specific state governors and U.S. business leaders with strong interests in bilateral free trade to bring legal challenges against Trump’s threatened actions, should he make good on his threat. Trump claims he doesn’t need the approval of Congress to impose across-the-board tariffs. However, some economists and foreign trade experts argue the reality is more complicated.

The U.S. Constitution gives Congress the authority to impose tariffs and to regulate commerce with foreign countries. But Congress has selectively delegated authority to the president to impose a range of trade restrictions on foreign countries under provisions of various congressional acts. Perhaps most problematic is a provision that grants the president wide authority to impose tariffs when imports are deemed a threat to national security. Whether illegal exports of drugs and people are covered by this or related legislative provisions would arguably raise new legal issues.

While U.S. courts have traditionally deferred to presidents on foreign affairs and trade policy, the bilateral trade environment would still be greatly improved if the U.S. legal system established clearer rules regarding the president’s authority to impose tariffs or other trade restrictions for purposes of protecting national security. However, dispositive court rulings on the issue would likely take years, while long-lasting damage in the meantime would be done to the bilateral economic relationship and to Canada’s economy.

Moreover, since Trump is fundamentally motivated by transacting, perhaps the Trudeau government could commit to addressing at least some of Trump’s concerns about Canadian policy in exchange for greater trade security. For example, Ottawa could accelerate the increase in Canada’s defence spending as a share of GDP toward Trump’s preferred target of 3 per cent. Canadian policymakers could also reform our quota systems for poultry and dairy products to rally support for Canada’s position among politicians in U.S. agricultural states, but it would obviously be politically fraught domestically. Less fraught would be dropping the recently enacted Canadian Digital Services Tax and related actions against U.S. Internet and social media companies.

Finally, since there’s no guarantee that bargaining with the second Trump administration will prove successful, the federal and provincial governments should also urgently address domestic impediments to business investment and productivity growth. In particular, Canada’s tax and regulatory systems should be overhauled to encourage increased investment in physical and human capital. Internal free trade remains a priority, and policymakers should eliminate legal and regulatory barriers to inward foreign direct investment to encourage increased competition and faster adoption of new technologies. These policy imperatives would benefit Canada’s economy regardless of the direction of U.S. trade policy.