Trump and the US-Canada contretemps

The rest of the world has watched with bemusement over the last month, as the United States and Canada, who share the world’s longest undefended border and much else, engage in a series of increasingly hostile gestures. What’s behind this, and what does it mean?

The episode began with the newly-elected American president threatening to impose 25% tariffs on both Canada and Mexico.  Such tariffs would have a devastating effect on Canada, since over three quarters of its exports are to the USA, representing nearly a fifth of its GDP.

Steep tariffs would also have an inflationary effect in the US itself, and even a whiff of them is already affecting consumer prices. More importantly, however, they would be highly disruptive to supply chains, given the level of economic integration in North America, particularly in the auto sector, where car components are often shipped multiple times across the border before a finished product rolls off the assembly line. Not surprisingly, Ford Motors and other major car manufacturers have come out against such tariffs. Moreover, America sources much of its aluminium, critical minerals, and energy from Canada.

Tit for tat

Should the US go ahead with tariffs, Canada has already indicated it would retaliate, instigating a damaging trade war. On the face of it, the consequences for Canada will be much more dramatic than for its American partner. Although Canada may be America’s largest export market, it accounts for only 17% of total American sales abroad. Canadian countermeasures, therefore, will need to be targeted, intended to inflict pain in districts that are important to Mr Trump’s electoral and legislative base. Watch for dents in the profits of Kentucky whisky distillers and Wisconsin motorbike builders. And Canadian leaders have mused about withholding certain strategic commodities. There should be no illusions of parity, however: Canada’s more exposed economy could be ravaged, while the American economy, ten times larger and far more diversified, is merely incommoded.

Beavers or hedgehogs

This asymmetry in between Canada and the USA is mirrored in an asymmetry in deterrent effect. Most Americans are blithely unaware of Mr Trump’s threats to their northern neighbour, although those threats are front-page news in Canada, and dominate public debate. In a situation where one side has nothing major at stake, but the other side’s very existence is in question, minor inconvenience to the former – such as a slight jump in petrol prices – may prove sufficient deterrent. Canada’s national mascot is the beaver, but the prickly hedgehog might offer a better strategy for survival: curl up, protect the head, and hope the spines keep predators at bay. It works when said predator is just after a snack, but not if it wants a main meal.

Whatever does the Donald want?

Part of the difficulty Canada faces in grappling with Mr Trump’s threats is discerning his aims. He seems to have no coherent set of demands or, if he has, they are a closely-guarded secret, perhaps unknown even to himself. The original rationale he provided for imposing tariffs was a supposed influx of drugs and migrants across the Canadian border. No matter that the numbers of either moving southward are minimal, and dwarfed by the northward flow of drugs, people and, also, guns. So much the worse for the facts. Canadian authorities were able to buy a month’s stay of execution of the implementation of tariffs by offering a number of largely symbolic measures on border management.

If border management were no longer at issue, Mr Trump swiftly turned his attention to the trade balance, correctly pointing out that Canada enjoys a surplus in exchanges of goods and services, which he calls a “subsidy.” In a trading relationship worth about a trillion dollars a year, Canada exports about US$45 billion more than it imports, but that modest advantage is more than cancelled if energy is not factored in. If Mr Trump has any economic theory, it seems to be a variant of 16th century mercantilism.

More recently, Mr Trump has griped about Canada’s digital-services tax, modelled loosely on the Australian one, which he claims unfairly penalises US-based tech behemoths. He also asserts that Canada discriminates against US banks. In truth, Canada has got a highly regulated banking system, which has served it well over several financial crises, but which has also insulated the Canadian banking sector from wider competition. Successive international banks – Citi, ING, and even HSBC – have failed to make a go of it in the Canadian market.

If Mr Trump has a complaint which is well-grounded, it is that Canada is not pulling its weight on defence, and has not done so for decades. In this, he is in good company with a long line of previous US presidents, who noted that Canada falls far short of the NATO defence spending target of 2% of GDP. Canada wisely stayed out of some American-led adventures, such as Vietnam and Iraq, but is not entirely a free-rider: Canadian forces played an distinguished role in Afghanistan and are currently deployed on NATO’S front line in Latvia and Romania. Nonetheless, for a country Canada’s size, its military is woefully under-funded and under-staffed.

Perhaps Mr Trump’s real motivation is personal, rather than national, aggrandisement. Or perhaps he is just throwing darts at random in the hope that one hits the bullseye. His 1987 book, The Art of the Deal, even if ghost-written, may reveal something of his thinking: “I never get too attached to one deal or one approach… I keep a lot of balls in the air because most deals fall through… the real excitement is playing the game.”

Anschluss?

Mr Trump, and a chorus of acolytes, continue to muse about annexing Canada, a risible notion, but one that nevertheless alarms and annoys Canadians. Short of outright invasion, which would be a bold move even for Mr Trump, annexation would be quite unachievable. Whether talk of a “51st state” is a negotiating tactic or mere self-gratification, cannot be known, but he also mutters about grabbing Greenland, the Panama Canal and even Gaza. Some would see strategic thinking here, a desire to secure assets such as critical minerals; but the US already has virtually unfettered access to them, as it has in practice to navigation in the northwest passage, which may become more than theoretical as climate change melts the ice. Such speculation is more by way of eccentric fancy.

America is ten times larger and more powerful than Canada, and immensely wealthier. But the magnetic force of the US is less than many imagine. Canadians are typically healthier, longer-lived, better educated, and – most astonishingly – more prosperous than their American counterparts. Per capita GDP is much higher in the US than in Canada, as is average net worth; but median wealth in Canada is significantly greater than in the US, because gross inequality south of the border skews average income and wealth. It may be overstating the case to call America a rich country with poor people, but not by much.

None of this is to ignore Canada`s fragility. It has long been beset by regional tensions and intermittent “national unity” crises. Its economic productivity has lagged chronically behind its peers, compounded by the absurdity of interprovincial trade barriers. The menace of Mr Trump may goad complacent Canadians into action to address these weaknesses, along with their cheerful but improvident underinvestment in defence. Canada is both blessed and cursed by its geography: lucky to have an enormous ready market and a generally benign neighbour, but vulnerable to that neighbour’s merest whim.

Un peu d’histoire

Canada and America have much in common, and to the outside world look, and sound, much the same, but the two have essential differences which manifest themselves politically. Canada as we know it today began as an uneasy alliance between French-speaking habitants and refugees from the American revolution, who fled northward in the 1780s. Although descendants of those “loyalists” are today a small minority of the Canadian population, they set the mould for Canada’s political culture, which is much more étatiste and far less polarised than the American model. That history has fostered a habit of compromise, and a diluted form of social democracy coupled with a more robust respect for liberty. In Canada, freedom wears a crown. Annexationist ambitions in the USA are just as old, and once projected mastery of the whole continent as America’s “manifest destiny”; but they have never translated into concerted action, and have always been tempered by the reality that absorbing Canada would tilt the internal American political balance: against slavery in the 19th century, and towards the Democrats in the 21st.

The price of offending the neighbours

Antagonizing wee Canada may seem cost-free, given the power imbalance. Already, however, Mr Trump’s threats have diminished US power, and not just vis-à-vis Canada. Its raw power, both military and economic, remains invincible, but at least half of America’s power is political and diplomatic. It is now squandering that form of power. The US can still compel and coerce but will find it far harder to persuade and influence. Prevailing by consent is cheaper and easier, but Mr Trump is not known to value consent. His threats have touched off a rare wave of nationalism in America’s northern neighbour: usually well-behaved Canadians have taken to jeering the “Star Spangled Banner” at international hockey matches, something that hasn’t happened in over two decades, when Canadians took a dim view of the US invasion of Iraq. If Canadians’ respect and admiration have taken a knock, the apprehensions of countries further afield will surely have grown: if even Canada is not safe from US aggression, who is? In short order the Iranian propaganda machine has taken to milking this episode. Henry Kissinger may or may not have quipped that “it might be dangerous to be America's enemy, but to be America's friend is fatal” but that aphorism looks increasingly apposite. Ukraine has learnt this, at its peril. The lessons for European and Asian allies are already unfolding.

A khaki election

Only a few months ago, Canada’s Conservative Party seemed to be cruising to an easy and commanding victory in elections which must be held this year. After a decade in power, Justin Trudeau had become the object of public distaste, and rightly or wrongly blamed for all ills. But Trudeau’s resignation after a caucus revolt and a split with the former Finance Minister, Chrystia Freeland, has changed the dynamic.  The Conservative leader, Pierre Poilievre, will now get greater scrutiny. Moreover, his brand of conservative populism may be tarnished by its association with Mr Trump. To complicate matters further, the American president’s economic and rhetorical attacks on Canada have shifted the public mood, and the 2025 election will now be focussed on the threat from the south, rather than on Trudeau’s policies and the desire for change. The leading contender for leadership of the governing Liberal party is Mark Carney, who will be familiar to British readers from his time as Governor of the Bank of England. While public fatigue with the Liberals means that the election remains the Conservative’s to lose, Carney is widely seen as having the gravitas to govern in hard times, and may be able to turn things around, or at least hold the Conservatives to a minority in the House of Commons: a “hung parliament” at Westminster, but nearly the norm in Ottawa. What remains to be seen is whether the cerebral technocrat can make the transition to retail politics, but the test will come soon.