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From right: Prime Minister Justin Trudeau, Foreign Affairs Minister Chrystia Freeland, United States Trade Representative Robert Lighthizer, U.S. President Donald Trump, Mexico’s Secretary of Economy Ildefonso Guajardo Villarreal, and President of Mexico Enrique Pena Nieto participate in a signing ceremony for the new United States-Mexico-Canada Agreement in Buenos Aires, Argentina, in November, 2018.Sean Kilpatrick/The Canadian Press
Canada’s economy faces major headwinds from the re-election of Donald Trump as U.S. president, with the threat of trade wars, tariffs and a bruising renegotiation of North America’s free-trade agreement all expected to stifle Canadian exports and dampen business investment on this side of the border.
Mr. Trump campaigned on a protectionist platform, promising a 10 per cent to 20 per cent universal tariff on all imports to the United States, and much steeper levies on Chinese goods and other products he claims are undercutting U.S. manufacturing.
This risks sparking off an international trade war, with tit-for-tat retaliation from other countries. And it poses a huge risk to Canada’s trade-dependent economy, which sends more than 70 per cent of its exports to the U.S. – worth some $650-billion in 2023.
Mr. Trump is also promising to run the U.S. economy hot, with deeper corporate tax cuts and a push for deregulation. Combined with tariffs, that could fuel U.S. inflation and increase global borrowing costs, which take their cue from U.S. interest rates.
Companies “have to be ready for chaos and the unpredictable,” said Jesse Goldman, a partner at Osler, Hoskin & Harcourt LLP who focuses on trade issues.
“This is very much going to be about America alone. Not only just America First, but America alone. And there doesn’t seem to be any favour that is going to be given to Canada at this point.”
In some ways, Canada has been through this before. When Mr. Trump was elected in 2016, he slapped 25 per cent tariffs on Canadian steel and aluminum and threatened to rip up the North American Free Trade Agreement. Canada and Mexico managed to salvage much of the trade agreement, which became the United States-Mexico-Canada Agreement (USMCA).
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This time around, a lot will depend on who is advising Mr. Trump on trade and other economic issues, said Stuart Bergman, chief economist at Export Development Canada (EDC).
“It really depends on what kind of a Trump administration we get. Is it a Trump 45 repeat? Or is it more of a Trump unchained?” Mr. Bergman said, referring to Mr. Trump’s last presidency.
Control over the House of Representatives remains up in the air following Tuesday’s election. Even without Congress, the U.S. president can impose a range of tariffs on national security grounds, which would allow Mr. Trump to move quickly after his inauguration on Jan. 20, 2025. If he does push forward with across-the-board tariffs, the impact on the Canadian economy could be devastating.
University of Calgary economist Trevor Tombe estimated in a recent report that a 10-per-cent tariff, combined with retaliation from other countries, could shave more than $45-billion off the Canadian economy and lead to a 1.6-per-cent drop in productivity. Desjardins economists have calculated that Canada’s economy could be as much as 1.7 per cent smaller by 2028, compared to a baseline scenario where Kamala Harris won the presidency.
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Alongside tariffs, Mr. Trump has said he will reopen the USMCA when it comes up for review in 2026. Most of his complaints about the trade agreement have focused on Mexican cars and the possibility that China is shipping goods through Mexico to skirt American tariffs.
However, the U.S. is also likely to push for more access to Canadian agriculture sectors and rules of origin that favour American car companies to the detriment of manufacturers in Canada and Mexico, Mr. Goldman said.
“I just think all of the uncertainty around the future of the USMCA and the rules of origin are going to have a pretty profound chilling effect on that type of investment coming into Canada, particularly for manufacturing,” he said.
Finance Minister Chrystia Freeland played down the risk of tariffs and the USMCA renegotiation in a news conference on Wednesday. The Canadian government “knew this outcome was possible” and was prepared for it, Ms. Freeland said, adding the government has a plan to avoid Canada being hit by Mr. Trump’s anticipated new tariffs, though she didn’t provide much in the way of details.
In an effort to show alignment with the incoming Trump administration, she said Canada and the U.S. are on the same page when it comes to concerns about unfair Chinese overcapacity, which led to Ottawa’s imposition of tariffs on Chinese electric vehicles and steel and aluminum last month.
As for whether Mr. Trump will want to renegotiate or tear up the USMCA trade deal, Ms. Freeland described it as “Donald Trump’s deal, he signed it, he and his team negotiated it and he and his team are proud of it.”
Matthew Holmes, senior vice-president, policy and government relations at the Canadian Chamber of Commerce, said that Canada needs to step up on a range of issues if it wants to maintain access to U.S. markets. That means spending more on the military to meet Canada’s NATO commitments, emphasizing Arctic defence and working with the Americans to address the issue of mass migration from Latin American and Caribbean countries.
“Trump views himself as a negotiator, as a trader. If we meet him on that level, then I think we can get some things done here,” Mr. Holmes said. “If we’re not a partner for them, then we don’t have a hope of starting a trade discussion.”
Canadian auto parts suppliers are reacting to Mr. Trump’s victory with a mix of unease and hope when it comes to the electric vehicle sector.
Canada has bet heavily on EVs and battery manufacturing in a bid to keep pace with the more muscular industrial policies pursued by President Joe Biden under his Inflation Reduction Act (IRA). That’s been a boon for parts makers here.
Yet Mr. Trump has promised to “rescind all unspent funds” from the IRA, which include incentives to promote EV use, and has said he will scrap mandated sales targets for EVs.
“When Trump threatens something, you should take him at face value,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association (APMA), who said Mr. Trump is correct in his assertion that EV mandates only benefit Chinese manufacturers.
But Mr. Volpe questioned Mr. Trump’s pledge to pull back from investing in the EV transition because “he and the people around him are concerned with ceding ground to the Chinese.”
Other large exporters are bracing for another bruising round of negotiations to save the USMCA, which will require convincing Mr. Trump and American lawmakers of “how important Canada is to their wealth and how integrated our manufacturing sectors are,” said Dennis Darby, CEO of the Canadian Manufacturers & Exporters trade group.
Similar to the Team Canada approach taken during the NAFTA talks in 2018, Mr. Darby said Canadian industry and government must co-ordinate their appeal to America’s leadership on economic, energy and supply chain security grounds.
As with Mr. Trump’s first term, Mr. Darby expected the president-elect’s second administration will “be really transactional” and that means Canada must be prepared to fully fall in line with America’s trade tactics toward other countries, namely China.
“Canada will have to pick a lane and be unequivocal in promoting North America and that may put us at odds with other trading partners,” he said. “Mr. Trump is always about making a deal and this is how we can do that.”
While risks to Canada’s economy and businesses abound, there are opportunities as well, said Mr. Bergman of EDC. A strong U.S. economy, juiced by tax cuts, usually increases demand for Canadian exports. And a weaker Canadian dollar compared to the U.S. currency should make Canadian exports more competitive.
“That takes a little bit of the sting away from the negative impact of what would come from tariffs,” he said.
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Publish date : 2024-11-05 11:00:00
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