The Weekly Wrap: We need stronger—not weaker—ties to the U.S. moving forward

One big idea that can be a win-win is for Canada to meet its 2-percent NATO target in part by investing public dollars into building mineral processing facilities in different parts of the country. The argument would be that Canada’s best contribution to continental defence and security isn’t troops or ships or planes. It’s becoming an alternative and reliable source of critical minerals in North America.

These ideas (and other unconventional ones like them) will no doubt be controversial—particularly in the moment of heightened Canadian nationalism—but Canada’s interests are ultimately best served by maintaining our market access to the U.S. and even deepening the economic integration between the two countries. The impending USMCA renegotiations, which may be upon us sooner rather than later, must therefore be understood by Canadian policymakers as a crucial moment for the country.

Trump’s reference to a “final economic deal” is a sign that the end game of the chaos and noise of the past several weeks is a revised free trade arrangement in North America. If this is right, Canadian policymakers should be preparing for this eventuality now. That means every idea must be on the table.

Trump is undoing 100 years’ worth of progress on free trade

For those Canadians like me who’ve mostly grown up in the era of free trade, the Trump administration’s proposal for 25-percent tariffs can be difficult to contextualize. How do they compare to the pre-NAFTA trade environment or even further back?

New analysis by University of Calgary economist and regular Hub contributor Trevor Tombe and Dartmouth College economist Douglas Irwin seeks to answer these questions.

As Tombe set out in a recent interview with Rudyard Griffiths and me, American tariff rates on Canadian goods were already falling quite a bit before the Canada-U.S. free trade agreement in the late 1980s and the NAFTA in the early 1990s. The average tariff rate was roughly 4 or 5 percent. Less than 10 percent of Canadian exports faced a tariff in excess of 5 percent.

Trump’s threat of 25 percent tariffs, therefore, wouldn’t simply return Canada to a pre-NAFTA norm, it would subject Canadian exports to the U.S. to tariff rates that are ahistorical. The only exception over the past 100 years is the Smoot-Hawley tariff during the Great Depression when tariffs on Canadian goods averaged between 40 and 50 percent.

This is consistent with Irwin’s new work that aims to put Trump’s tariffs in a historical context. Although there are some challenges in comparing tariffs over time (due for instance to the share and importance of trade), he adjusts the numbers to compare Trump’s 25-percent tariffs with the Smoot-Hawley era as well as earlier rounds of tariffs in 1922 and 1890.

What he finds is that when one accounts for the growing importance of trade on the U.S. economy and Trump’s proposed tariff rate, the threat of 25 percent tariffs on Canada is roughly twice as big in terms of the change in the average tariff rate as was the case under Smoot-Hawley. They amount to returning the average U.S. tariff rate to levels not seen since the 1940s.

Tombe and Irwin’s analysis tells us how radical Trump’s proposals are. It’s not quite right to say that he’s implicitly undoing NAFTA. It’s more accurate to say, as I wrote last weekend, that he’s undoing nearly 100 years of progress we’ve collectively made on reducing tariffs, enabling freer trade, and wrestling our economies away from the impulses and instincts of politicians.

The net effect of these tariff policies (if they’re ultimately implemented) will be for policy and politics to reassert itself over markets when it comes to investment and production decisions. North American firms will no longer organize their supply chains based on efficiency and comparative advantage. They’ll now increasingly base those decisions on minimizing tariff costs. The unseen costs for customers, investors, and workers will undoubtedly exceed the tariff costs themselves over the long run.

The intellectual roots of Trump’s economic agenda 

This week, we brought American economic thinker Oren Cass to Ottawa and Toronto for two events with The Hub community on the subject of Trump’s economic agenda in general and his threat of tariffs against Canada in particular.

Cass, as readers may know from his previous appearances on Hub Dialogues, has heterodox views on markets and the role of government in the economy. His arguments in favour of industrial policy and even tariffs have made him an outlier in traditional conservative circles and an influential voice on the New Right—including with parts of the Trump administration.

Although aspects of the administration’s policy agenda (such as the pending renewal of supply-side tax cuts for businesses and individuals) diverge from Cass’ policy priorities, he argues that the broad direction—including an effort to restructure the global trading system beginning with tariffs—is a sign that his ideas are on the ascendancy on the American Right.

He also points to a generational divide among conservatives as a proof point. Those aged 40 or older came of age during the Reagan era and remained committed to the conservative orthodoxy of free markets and free trade. And those younger than 40 years old are much more open to new thinking about political economy.

This means that while Republican members of Congress are still mostly Reaganites, Cass explains that politicians are a lagging indicator. Those staffing key roles with the administration as well as the congress, think tanks, advocacy groups, and elsewhere in the conservative ecosystem are disproportionately supportive of his more heterodox views. He claims that the philosophical divide among this increasingly influential group is 90:10 in his favour.

If he’s right, Trump won’t be an aberration. He will prove to be a transiton figure in the ascendancy of the New Right.