Canada’s punditry class is in overdrive analyzing President Trump’s tariff threats and other provocations toward the country. The prime minister’s gathering of corporate and union executives together with his advisory council is a welcome initiative, and so are his consultations with political leaders in Europe and Asia worried about the implications of U.S. tariffs on the global trade system. Ideally, Canada’s response will be with a unified voice, but lessons from other eras—Nixon’s devaluation of the U.S. dollar, the extreme protectionism of Congress in the 1980s, and Trump’s first term—will inform the timing and nature of countermeasures.
Many leaders are surprised by Trump’s disruptive moves and often outlandish proposals, like taking over Greenland, the Panama Canal, or ownership of the land of the Palestinians in Gaza. In fact, Trump is following the playbook set out in The Art of the Deal. His rhetoric spans a wide range of topics, but his primary concerns remain the southern border, illegal immigration, defence and security, and America’s rivalry with China.
His approach to negotiations begins with a zero-sum outlook, and in dealing with adversaries, friend or foe, he leverages American strength to frame issues into a binary narrative. It matters that his perspective often polarizes opinion, distorts the truth, and oversimplifies complex policy issues.
For those key decision-makers outside the MAGA world of Trump, it is difficult to know in advance what the U.S. president is signalling. This, though, is the point. Forgoing any coherent policy rationale in favour of empty slogans is part of Trump’s destabilizing negotiating strategy. It is a feature, not a bug, that his arguments—on trade balances, border security, fentanyl smuggling, or national sovereignty—rarely accord with facts.
That this is counterproductive in the long run is obvious. On issues vital to American interests—the role of the U.S. dollar as a reserve currency, U.S. soft power via foreign aid, democratic allies reinforcing U.S. defence and security, trade policy that assures vital inputs are available for the American economy (including critical minerals and energy supplies)—Trump’s bluster actually weakens America’s standing with close friends and allies and it provides reassurance to countries like Russia, China, and North Korea.
While Canada is well-positioned to communicate its trade position to the White House and policymakers beyond the Washington Beltway, the immediate environment will still provide a shock to Canada’s fragile economy.
Three imminent dangers loom in response to Trump’s tariffs. The first is a direct tit-for-tat, across-the-board approach to retaliate so that American consumers feel an immediate cost, such as high prices or product shortages. While tempting, this broad-brush strategy is counterproductive.
The second danger involves straying too far from the designs of past trade deals like the Canada-U.S. Free Trade Agreement and NAFTA that aimed to facilitate freer market access across the continent. The emphasis in any negotiations, both now and in the planned 2026 CUSMA renegotiations, should be on global trade expansion.
A proactive approach is essential. Canada must understand the U.S. position, but also how other countries perceive Canada’s protectionist policies in sectors like banking, telecommunications, supply management, transportation bottlenecks, airport and ocean port ownership, and interprovincial trade barriers. Canada’s leaders must be willing to both make hard choices in abandoning these policies and then make the case for the public for why doing so was necessary.
The third danger arises from how public policy on one issue impacts others. For a generation, Canada’s low levels of defence spending—among the lowest of all NATO countries, and one of the smallest among G7 countries—is a reminder that Canada’s global standing is partly due to this privileged status in this august forum—which meets again in June, and by coincidence in Canada. It is even more alarming that underinvestment in defence exacerbates threats to Canada’s sovereignty, especially in the Arctic. Canada must get serious about honouring its international commitments; not doing so has isolated it on the world stage and weakened its leverage in its negotiations with the Trump administration.
Overall, Canada is widely seen as a risk-averse country, a contrast to the more disruptive, revolutionary, thrusts of American society. This risk aversion permeates Canada’s public policy approach and its economy, which features an over-reliance on Crown corporations instead of allowing the full participation of private firms in certain key sectors.
Canada’s tolerance of interprovincial trade barriers, whether in professional credentials, or other areas like procurement, results in 10 little markets rather than a unified national economy. More troubling, is the federal government’s reluctance to challenge provinces defying the Constitution, choosing instead to avoid confrontation. How Canadian!
Since the end of the Second World War, Ottawa and the provinces have been content to welcome foreign investment as a substitute for Canadian entrepreneurship, which made some sense in capital-intensive sectors like energy, auto production and assembly, and some sectors like mining. Restrictive policies on foreign ownership—like the Foreign Investment Review Act and Canada’s National Energy program—were seen as effective tools to limit foreign ownership, which in practice meant U.S. ownership. Fortunately, both policies were abandoned.
For fifty years, various governments promoted a third option: diversifying away from the U.S. and seeking market access to the European Union or Asian countries. This initiative had only limited success, in part due to the simple fact of proximity; it only takes an overnight truck drive to reach an immediate customer base of 25-30 million customers.
The successful free trade agreement between Canada and the U.S. signed in 1988 was a game changer for Canadian firms, including because it allowed foreign firms to establish factories and assembly plants in Canada and export to the U.S. market. Canada cannot simply substitute free trade with America with free trade with the world. While diversifying Canada’s trading relationships is a worthy goal, repairing our relationship with the U.S. must be the number one priority.
For decades, Canada’s political system has failed to make long-term policy choices, opting instead for solutions that benefit select regions or elite groups. Other countries have accepted significant policy disruption from past practices and adjusted accordingly.
In the 1970s, Ireland made a strategic pivot and chose to join the EU rather than continue its traditional economic ties with Britain. This shift required a fundamental change in decades-old policy stance, including significant investment in higher education to attract foreign companies and redirect the economy to conform to Europe’s trade and economic policies. Similarly, the Emerald Isle’s low corporate tax rate became a key lure for multinational companies needing access to knowledge workers. Today, its prosperous economy is the envy of low-growth countries like Canada.
Japan provides another instructive approach through the concept of gaiatsu, a Japanese term describing the use of foreign pressure to overcome domestic reluctance to implement bold policy reforms. The 1985 famous Plaza Accord, which saw the rapid appreciation for the Japanese yen to other currencies is a famous example of how external pressure can compel significant political change.
For two decades, Canada has lacked the mechanisms to shift the policy framework of high taxes, a bias towards consumption, and exploitation of natural resources, while immigration levels have determined the country’s economic growth. There is no doubt that Canada is facing a disruptive moment. But turbulent times can initiate long-term benefit, whatever the short-term pain. Perhaps, in the end, Trump’s tariff threats could serve as a gaiatsu moment for Canada, forcing much-needed reforms to be put on the national agenda.
