Rudyard Griffiths: The curse of events and what a second Trump presidency means for Canada

Internationally, the end of the Ukraine War and the return to a strict One China policy will have a marginal impact on Canada given our global irrelevance. But American isolationism will come with a price: a laser-like focus on the security of the U.S. “homeland.” This will matter to Canada in the context of hemispheric defence, specifically the Arctic. We will be under acute pressure to significantly increase defence spending to secure our borders and meet our NATO target of two percent of GDP. This will be non-negotiable in terms of getting Trump’s security guarantee, implicit and explicit, against Russian and Chinese predations on our northern sovereignty. In short, expect a large, multiyear tax bill in the tens of billions to fund a much bigger military budget.

More worrying for our borders is Trump’s promise to engage in the mass deportations of millions of migrants currently in America. This is a longstanding and core policy plank of the MAGA movement. Its implementation will sow a wave of panic among migrants who face expulsion back to failed and failing states in South America, the Middle East, Africa, and across the globe.

It is entirely rational and should be expected that many hundreds of thousands of these migrants will open Google and punch in the two-word search query “Roxham Road.” No one in Ottawa is talking today about what could be one of the biggest migration crises to hit Canada, possibly in six short months. How will we secure our border? What will we do to cope with the ensuing humanitarian crisis? With migration already at all-time highs and our country severely supply-constrained in terms of education, health care, transportation, and housing, how are we going to cope?

If this scenario wasn’t already scary enough, consider the next plank in Trump’s agenda: a global tariff regime. This is his signature economic initiative, and this time Canada will not be passing “Go” with a proverbial $200.

Every indication suggests that Canada, like the rest of the world, will end up with a 10 percent or more tariff on our U.S. exports. Why? Because in a second Trump presidency tariffs will be driven solely by domestic fiscal priorities. Trump is committed to funding largescale, across-the-board personal and corporate tax cuts. He will do so against the backdrop of a massively deteriorated, post-COVID public balance sheet. The only way to fend off a Liz Truss-style revolt of U.S. bondholders and a subsequent run on American debt is to generate new, large government revenues to offset the cost of hundreds of billions in tax cuts. Tariffs are a fiscal necessity for Trump, not an option, and Canadian firms and our export-dependent economy will pay a steep, painful price.

The combination of large tax cuts, massive deregulation, tariffs, and likely a new, uber-dovish Federal Reserve Chair, will together be inflationary. This matters for Canada. Higher U.S. inflation means higher bond yields and the real risk that a Canadian economy, gored by Trump’s global tariff regime, will not be able to benefit as it might expect from an independent Canadian monetary policy and lower borrowing costs.

We are loathe to admit it but Canada’s monetary policy can only decouple so much from the U.S.. Push this too far, and a plunging Loonie quickly becomes the signal of too wide a spread between Canadian and American yields. As our economies diverge on even more radically different growth paths under a second Trump presidency, do we cut rates anyway and court collective immiseration through a sub-sixty–cent dollar and the destruction of our purchasing power? Or, do we acknowledge the limits of our monetary independence from an overheating U.S. economy spitting out inflation and higher yields and resign ourselves to labouring under higher-than-optimal borrowing costs? The least bad answers we come up with to such questions will have huge impacts on housing prices, foreign investment, productivity gains, and just about every important economic issue we face today.

What can we do to head off this complex, high-stakes series of risks that a second Trump holds for Canada? There is no silver bullet, but some common-sense policies quickly come to mind.

First, we cannot wait until 2028 and the next defence review, as indicated by the current government, to show how we will meet our NATO funding commitment by 2032. This isn’t credible, and it sets us up for failure with the Trump administration. Despite the fiscal pain of higher taxes or cuts in public expenditures, we need to show a credible path to two percent of GDP being spent on the military, including Arctic defence, before 2028. This is not only politically salient, it is tied to the economic argument we are set to have with the Trump administration over tariffs. Having a chance not to be ensnared by a global U.S. tariff on imported goods depends on being an enthusiastic, willing, and enabled partner committed to securing the continent and the U.S. “homeland.”

The security argument could also help in the context of managing the chaos that is likely to occur at our shared border in the instance of mass U.S. deportations of migrants. As amply demonstrated in recent years, we lack the state capacity to effectively police our own border and will need American assistance in the face of a migration crisis. Having a secure northern as well as southern border is a core, high-conviction policy of Trump’s MAGA movement and one we can and should help with.

The inflationary pulse that is likely to course through the global economy in a second Trump term will be harder to manage domestically. It will certainly hurt less if the U.S. economy remains a more as opposed to a less tariff-free zone for Canadian companies. As Sean Speer, my compatriot at The Hub, likes to point out, the difference between a two percent and three percent growth rate in our economy is fully one-third. We will need every ounce of growth we can wring out of the economy to try and get it up to a speed in striking distance of the U.S. to avoid a dangerous divergence in bond yields and all the suboptimal economic decisions this would entail. Low tariff access to the U.S. market will be the single most important determinant of whether we fail or succeed in this task.

Canada is very likely in for a period of unusual economic, political, and diplomatic turbulence in its relationship with the U.S. thanks to the growing chances of a Trump victory this November. As the saying goes, to be forewarned is to be forearmed. And this is the attitude we urgently need our policymakers to adopt. The events of the past week have more than just nudged the odds in favour of a second Trump presidency. It’s now the most likely outcome of November’s vote. Canada’s leaders wake up to the risks that lie ahead and start to prepare. Time is fast running out.