Canada’s perilous place in Trump’s new world order

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Two events this past week clearly demonstrate that the world order has been turned upside down and inside out. The diplomatic dustup in Washington between U.S. President Donald Trump and Ukrainian President Volodymyr Zelenskyy has left the NATO alliance in tatters, with U.S. security guarantees to its allies very much in doubt, while the pending imposition of U.S. tariffs on Mexico and Canada, who are to be joined by Europe, will strain economic relationships among western economies.

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Even if Trump backs off on tariffs, the U.S. will no longer be viewed as a reliable ally. The old, postwar world order in which U.S. supremacy enforced international rules is now passé. Instead, a new world order recreates the prewar pattern of nationalistic fiefdoms competing with each other.

The perilous question for Canada is choosing our place in Trump’s new world order. Do we tie ourselves closer to the U.S. for security and economic reasons? Or do we try to reduce our dependency on the U.S. by seeking stronger relations with Europe and other allies?

A 25 per cent tariff, even with a 10 per cent carve-out for energy-related products, will raise enormous pressures on Canada and Mexico. A new paper from prominent German think-tank CESifo estimates the impact on Mexico and Canada and, in a word, it’s simply awful.

Written by Lisandra Flach and Andreas Baur, the report is based on a sophisticated simulation model with 141 countries and 65 economic sectors. The authors evaluate medium-term impacts of the tariffs and dollar-for-dollar retaliation by Mexico, Canada and China. They estimate that the U.S. tariffs cause our exports to fall by 17 per cent. But if we retaliate, which we’re already doing, the combined hit is 28 per cent. A shock that big is bound to cause the Canadian dollar to fall, which will offset some, but not all, of the harm and will also lead to higher prices here.

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Manufacturing is especially hard hit, which is bad news for Doug Ford’s auto-intensive Ontario. With retaliation, Canadian manufacturing value-added falls 14.2 per cent (13.3 per cent in Mexico). Agriculture and mining (including oil and gas) loses 6.7 per cent (0.6 per cent in Mexico), while Canada’s service sector suffers just a 0.4 per cent loss (1.8 per cent in Mexico).

As for the U.S., its total exports fall an impressive 22 per cent as a result of Canada, China and Mexico’s retaliation. But exports are only seven per cent of the U.S. economy, so the overall economic impact is not nearly as significant as it is for us. Value-added falls by just 1.3 per cent in U.S. manufacturing, 0.3 per cent in services and 2.4 per cent in agriculture — in other words, much less than here and in Mexico.

This alarming analysis leads to two conclusions: First, though retaliation probably makes us feel better, it adds to the harm — and it adds a lot. Second, the U.S. has a much stronger hand in the medium term because of its size and much lower dependency on imports.

With good reason, Canadians are talking about finally removing interprovincial trade barriers to strengthen the internal economic union. But that will take time — unless, given the urgency, we act much faster than our usual glacial pace on such matters — and it offers only a partial offset even in the medium term. Trade diversification is even harder since proximity so strongly favours trade with the U.S. We have many free trade agreements but it will take years — again: if we stick to our usual pace — to build infrastructure and adopt the necessary regulatory and tax policies to compete internationally. As for security, we need the American defence umbrella, especially in the Arctic, and no other friendly power can provide it.

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To avoid calamity, our only choice over the next four years, whether we like it or not, is to negotiate. Perhaps Trump will realize he has to renew NAFTA 2.0 soon in order to avoid further economic disruption. If so, we will have to be willing to give up some politically sensitive trade barriers, like supply management, and invest more in defence. Sure, Trump has broken the spirit of NAFTA 2.0 with his tariffs. But future presidents likely will be more trustworthy, and getting rid of our own damaging trade barriers will be good for our economy.

Even a North America customs union with a common North American tariff might make sense in the long run. Our offer to apply the same tariffs on Chinese goods as the U.S. does is already a step toward that ideal. If that works to eliminate tariffs, not just in the next four years but for decades to come, it might be worth pursuing.

We need to be realistic. Canada has a weak hand but, with our resources and security needs, we align more naturally with the United States. We are right to feel insulted by Trump but he won’t be there forever. For now, at least, the world order has changed and we have to find our place in it. That is what the federal election needs to be about.

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