Against Donald Trump’s tariffs, Canada has only difficult choices and costly consequences

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Steve Verheul was Canada’s chief trade negotiator from 2017-21, leading negotiations that resulted in the Canada-United States-Mexico Agreement. He is now a fellow at the Public Policy Forum and a principal with GT and Co. Executive Advisers.

Among a number of trade challenges Canada is likely to face with the incoming Trump administration, there is one that is the most immediate, and potentially most costly: president-elect Donald Trump’s proposal for an across-the-board 10-per-cent tariff on imported goods (20 per cent and even 50 per cent have also been mentioned.)

The extent of the integration of the Canadian and U.S. economies would make the impact costly for Canada. Autos and energy would be hardest hit, although few sectors would escape significant harm.

Given Canada’s reliance on the U.S. market (the destination of 77 per cent of the country’s exports), Canada would have to press hard for an exemption from any across-the-board tariff the U.S. might impose.

The key for Canada to succeed will be the same as it was when we negotiated the Canada-United States-Mexico Agreement. We leveraged a united front, including the federal, provincial and territorial governments and a close alliance with industry and labour. We advanced an agile and broadly supported negotiating strategy to deal with unpredictable U.S. negotiating positions.

But using such a Canadian coalition won’t be as easy this time around, and there’s a lot of work ahead. Any path forward on this issue comes with difficult choices, and costly consequences.

Mr. Trump has used a number of rationales to justify his proposed tariffs: to encourage businesses to move production to the U.S. to avoid the tariffs; to address trade deficits with trading partners; and to rebalance U.S. tariff levels with the higher tariffs imposed against U.S. goods by other countries. Canada can argue that it warrants an exception to tariffs because, while it has a trade surplus with the U.S., this is mainly a result of energy exports the U.S. needs rather than manufactured goods.

There is, after all, a reason tariffs between Canada and the U.S. are almost non-existent under CUSMA. But Mr. Trump feels most strongly about the first rationale – encouraging businesses to move to the U.S. – which Canada cannot address.

Even an exemption would come at a high price. Canada may be forced to negotiate to get the tariffs lifted on a sector-by-sector basis, which would be a long and costly grind.

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Part of the price of a broader exemption granted to Canada could be that it would have to impose the same kind of across-the-board tariffs against other trading partners in order to avoid becoming a back door to the U.S. market, which the U.S. would find unacceptable.

This would create significant tensions with all of Canada’s trading partners outside the U.S. and would lock Canada even more tightly into its reliance on the U.S. market. Matching U.S. tariffs only on products that would be likely to end up in the U.S. market could be a start in limiting the impact, but the damage to Canada’s trade with non-U.S. markets would still be considerable.

If an exemption is not possible or the cost is too high, Canada, like other countries, would need to retaliate against the U.S. Canada would be more strategic in targeting its retaliation compared with an across-the-board approach, aiming to impose maximum impact on the U.S. and minimal impact domestically, but it would be difficult to match the scale of damage of the U.S. tariffs.

Retaliation would of course inevitably hurt Canadian interests as well as those of the U.S. and would be expected to further raise costs. Other trading partners, in particular the EU, have undertaken extensive preparations to respond strongly against the U.S. if it were to impose the new tariffs. In this scenario, Canada should co-ordinate closely with the EU and others to maximize pressure on the U.S. while always leaving an opening for a Canada-U.S. solution. With widespread retaliation expected against the U.S., one modest benefit would be that Canada’s access to other markets would be significantly better than that of its U.S. competitors.

Canada’s other option would be to do nothing and wait to see how further developments might unfold. The U.S. may find the tariffs too expensive to maintain and remove them either partly or completely or it may reach out to negotiate settlements with certain trade partners. After all, such tariffs breach every trade agreement to which the U.S. is a party and would impose costs on the American economy as prices rise for goods the U.S. doesn’t produce and inputs its manufacturers need.

Not retaliating could allow for a more positive relationship with the U.S. that could lead to an easier resolution and would avoid any additional impact caused by retaliation.

More likely, however, this approach would leave Canada negotiating from a position of weakness and would set the wrong tone for what is now almost certainly a renegotiation of the CUSMA when it comes up for review in 2026.