In the latest episode of Trump’s Trade War, Rudyard Griffiths, publisher of The Hub, spoke with Ian Lee, a professor at the Sprott School of Business at Carleton University, about Canada’s escalating trade tensions with the United States. The discussion focused on the recent doubling of U.S. tariffs on Canadian aluminum and steel, set to take effect as early as tomorrow, and the broader implications of Canada’s retaliatory approach. Lee argued that Canada’s current strategy of retaliatory tariffs is misguided and could lead to severe economic consequences, including a potential recession.
Here are three major takeaways from their interview:
- Retaliatory tariffs are a flawed strategy: Canada’s approach of imposing retaliatory tariffs on the U.S. is based on the mistaken belief that it can force the U.S. to back down. Instead, the U.S. has escalated tariffs, leading to a “catastrophic failure” of national leadership, said Lee.
- Canada needs economic reform: The country’s long-standing policy of “subsidize, protect, and regulate” has led to declining competitiveness and productivity. Lee called for a shift toward greater economic openness and a comprehensive new trade agreement with the U.S.
- Risk of economic decline: The escalating trade war could lead to a recession and a permanent reduction in Canadians’ standard of living. Lee warned that without significant policy changes, Canada risks following the path of countries like Argentina, which experienced a dramatic economic decline due to protectionist policies.
The failure of retaliatory tariffs
Ian Lee criticized Canada’s national leadership, both at the federal and provincial levels, for doubling down on retaliatory tariffs in response to U.S. trade actions. He pointed out that this strategy has been consistently advocated by Canadian leaders, including former prime minister Justin Trudeau, prime minister-designate Mark Carney, and Ontario Premier Doug Ford. However, Lee argued that this approach is based on a flawed assumption: that Canada, with around 2 trillion GDP, can force the U.S., with its nearly 30 trillion GDP, to back down through retaliatory measures. Instead, the U.S. has responded by escalating tariffs, as predicted by Stephen Miran, who was nominated in December to chair Trump’s Council of Economic Advisers, warned that the U.S. would retaliate even harder if other countries imposed tariffs.
Lee emphasized that this strategy is a “catastrophic failure” of national leadership, as it ignores the reality of the U.S.’s economic dominance. He noted that countries like Mexico and China have taken a more targeted and less antagonistic approach to trade disputes with the U.S., avoiding the kind of escalation that Canada is now facing.
The need for Canadian economic reform
Lee argued that Canada’s current trade crisis is symptomatic of a deeper, long-standing issue: the country’s reliance on a policy framework of “subsidize, protect, and regulate” over the past 50 to 70 years. “We believed as the national strategy, we could regulate and subsidize and protect our way to national prosperity,” Lee noted.
This approach, he said, has led to a gradual decline in Canada’s competitiveness and productivity. Once at 90 percent of U.S. productivity levels, Canada’s productivity has now fallen to around 50 percent, according to Professor Trevor Tombe of the University of Calgary. Lee cited a speech by Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, who warned that Canada’s protectionist policies, interprovincial trade barriers, and failure to diversify its economy have contributed to this decline.
Lee called for a fundamental shift in Canada’s economic strategy, urging the country to open up its markets, reduce protectionism, and negotiate a comprehensive new trade agreement with the U.S. that goes beyond CUSMA (Canada-United States-Mexico Agreement). He argued that such an agreement should address not only trade but also issues like border security, illegal immigration, and drug trafficking. Lee warned that without these changes, Canada risks a permanent reduction in its standard of living.
The risk of Canada’s economic decline
Lee expressed deep concern about the potential economic consequences of Canada’s current trade policies. He warned that the escalating trade war could lead to a recession; not just a cyclical downturn but a structural transformation that would permanently lower Canadians’ standard of living.
He compared Canada’s situation to that of Argentina, which he said went from being one of the wealthiest countries in the world in the early 20th century to a struggling developing nation due to aggressive protectionist and anti-competitive policies.
“It’s not a viable alternative [to subsidize, protect and regulate], unless we want to become the next Argentina,” he explained.
Lee also drew parallels with the European Union, where former European Central Bank governor Mario Draghi has warned of declining productivity and competitiveness.
Lee dismissed the idea of Canada pursuing a third option of economic self-sufficiency. He argued that no country, especially one with a population of 40 million, can produce everything it needs domestically. Instead, he urged Canada to embrace greater economic openness and competition, warning that the alternative is a future of declining prosperity.
Generative AI assisted in the production of this story. If you are quoting from or referencing this episode, please refer to the audio to verify.
