No easy way to de-escalate Canada-USA trade war

As a federal election kicks off, the trade war with the U.S. is casting a long shadow  over voters’ choices, and whoever forms the next government will have  the tall order of trying to draw this conflict to a close.

“President  Trump wants to break us so America can own us,” said Liberal Leader  Mark Carney at a campaign stop in Gander, NL on Monday. “We are over the  shock of betrayal, but we should never forget the lessons. We have to  look out for ourselves.”

International trade experts interviewed by Canada’s National Observer say  that will be much easier said than done. The two economies are more  integrated than ever before, and President Donald Trump’s chaotic  governing style makes it extremely difficult to know how to even begin  to unravel this dispute.

“This  is uncharted waters,” said David Plunkett, Canada’s former ambassador  to the European Union and chief trade negotiator during Stephen Harper’s  time in power. “All the normal go-to elements of policy-making that  [I], and people like me in the past, have used aren’t necessarily valid  anymore.”

Typically when countries that  have signed free trade agreements disagree, the dispute is referred to a  tribunal as part of a dispute settlement mechanism baked into the  agreements. Those dispute settlement processes are designed to contain,  de-escalate and de-politicize a conflict by forcing the parties to make  technical arguments to a judge instead of retaliating against other  sectors of the other’s economy.

That option is increasingly irrelevant.

“Donald  Trump is so far outside of the bounds of how trade disputes are  supposed to be managed that we’re back in what seems like early 20th  century politics of trade policy, but in an environment where we have just-in-time supply chains  that make a trade war really nightmarish,” said Russell Williams, an  associate professor at Memorial University and expert in international  political economy.

Amidst  the uncertainty, here’s what’s known: After months of the U.S. putting  tariffs on Canadian exports and Canada slapping retaliatory tariffs on  American goods, the White House is threatening to ratchet them higher on  April 2. Trump keeps repeating his annexation threats, while Carney has  said the two countries can talk trade when Trump stops disrespecting  Canada.

On the economic side, Bank of Canada Governor Tiff Macklem told the Calgary Chamber of Commerce  Thursday that economic uncertainty has reached levels not seen since  the 1930s, and the damage on both sides of the border has begun.

On the public opinion side,  about 80 per cent of Canadians support retaliating against the U.S. by  using electricity, aluminum, potash, oil and gas exports as leverage,  according to polling firm Leger. And 40 per cent of Canadians consider  Trump’s economic aggression to be the top issue as voters prepare to  head to the polls.

It’s clear that tariffs  have the potential to wreak havoc on the Canadian economy and there is  public appetite to fight back. What’s less clear is how to de-escalate  the trade war, in large part due to the political moment we’re in and  the mercurial nature of President Donald Trump.

“You  can bemoan the demise of days gone by, but looking forward, you just  can’t assume there’s an easy way out of this and part of it is the  character of the person you’re up against,” Plunkett said.

Avoiding a Zelenskyy moment

In  his first week in office, Carney met with the country’s premiers and  leaders from long-time allies in other countries to chart a short- and  long-term response to the tariffs. He has conceded there’s a limit to how much Canada can do to respond, and experts say the options to de-escalate this trade war are narrowing.

With  an election underway, Carney, or any prospective leader, must be  careful to avoid a Zelenskyy moment — that is, walking into the White  House lion’s den for a painful, embarrassing meeting  that has only two likely outcomes: grovelling to avoid further attacks  from President Donald Trump, or standing firm and provoking the  Americans further.

In other words, a political suicide mission, given the mood of Canadians.

“Anyone  that’s actually trying to be prime minister right now cannot afford to  go and be put through what Zelenskyy was put through,” Williams said.  “Canadians just won’t wear that, and you would do that at your peril as a  politician.”

That helps to explain why  Carney broke with tradition and made his first international visit to  Europe instead of the White House. Carney met French President Emmanuel  Macron in Paris, and U.K. Prime Minister Kier Starmer in London, in a  whirlwind tour with Canada’s long-time allies. The move carried symbolic  weight, but it also could reflect a strategic pivot to Europe — a  message to Trump that Canada has options to weather a trade war.

Williams  said Trump’s repeated talk of Canada becoming the 51st state is pushing  a negotiated end to this economic crisis out of reach. It’s “almost  impossible” to de-escalate the trade war in this context because any  compromise with the Americans risks triggering a nationalist uprising in  Canada.

“The art of how not to do a deal is where we’re at,” he said.

Short-term options to de-escalate

Despite  repeated trips to Washington from federal and provincial leaders,  Canada has failed to persuade the Trump administration to abandon its  tariff threats, so has turned to dollar-for-dollar retaliatory tariffs  instead.

“Canada is handling things quite  well so far,” said Geneviève Dufour, a professor at the University of  Ottawa, in an email, referring to the retaliation. But it would be even  more effective to speak with one voice.

The  premiers have made it clear they don’t all see eye to eye. Alberta  Premier Danielle Smith is threatening a national unity crisis if the  federal government takes steps to restrict or put export taxes on oil  and gas exports — something that Ontario Premier Doug Ford has openly criticized, saying that oil and gas exports are a “trump card” in the negotiations that should be kept on the table.

Dufor said Canada should not negotiate in public, or sector by sector to remove tariffs.

“In  fact, we should not negotiate at all until things calm down,” she said.  “Just like in a traditional war, we don’t negotiate under bombardment;  we wait for a ceasefire and then negotiate calmly in a serene  environment.”

She concedes a tariff  ceasefire is unlikely to resolve the situation. Trump does not respect  international obligations, so there is nothing to guarantee he wouldn’t  violate any agreement the following week, she said.

“We have to face the facts: we are in for a rollercoaster ride for the next four years.”

Williams said the retaliatory tariffs are part of a “containment strategy” to prevent the trade war from escalating further.

“We’re  trying to say to the United States, ‘we’re prepared to fight, we’re  prepared to lean into this, but we’re not doing it yet because we’re not  sure you’re really serious about this’,” he said. “I do think there’s  some logic in not provoking the United States here, because we can’t  read the Trump administration.”

Williams  said because Trump keeps threatening Canada’s existence, a political,  rhetorical de-escalation is essential before any compromise on trade can  be reached.

But there’s a window of  opportunity for Canada to more strongly assert itself that could be  missed if officials stay on the cautious path, he said. The U.S. economy  is weakening — potentially veering into a recession — creating a  vulnerability Canada could exploit by doubling down on retaliatory  measures to apply even more pressure to the American economy.

“The  implications of that might bring the United States to the table faster  than trying to take the cautious approach,” he said. “That’s a tool we  may not have at our disposal in a few months. We may lose our  willingness to fight as the impact of tariffs hit Canada, and the United  States may find itself in a better position.”

On Friday, Canada launched an advertising campaign  in the U.S. with the slogan “Tariffs are a tax on hardworking  Americans.” The goal is to nudge American public opinion closer to the  Canadian position.

Plunkett said more  Americans being concerned about the negative consequences of a trade war  could present Canada with an off-ramp, but it’s something that has to  be truly internalized by the White House.

“I’m not convinced that Trump himself will listen to a foreigner telling him you’re doing something stupid,” he told Canada’s National Observer in an interview. “I think this has to be internalized, and they have to reach the conclusion themselves.

“Whether  that’s the stock market reactions, whether it’s individual industries  saying ‘you’re going to cost us’ … But there has to be an  internalization of what this really means, and what are the  consequences.”

Long-term pivot to Europe

It is widely recognized there is value in diversifying Canada’s export markets. Every expert interviewed by Canada’s National Observer said pursuing deeper trade with Europe makes good strategic sense for Canada.

“We’ve  gone 40 years here believing integration with the United States and the  embrace of neoliberalism was the path of least resistance for the  Canadian economy,” Williams said. “We were warned there would be  consequences for this — that dragging ourselves further into the  American orbit would have long-term consequences for our sovereignty and  for our political autonomy — and those chickens are coming home to  roost.”

Plunkett, who was significantly involved in the negotiation of Canada’s free trade agreement with Europe, called the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), said the agreement is under-used and could be the basis for much stronger trade.

Canadian  businesses have tended to look south because there is a vast, rich  market in the U.S. right on their doorstep. The U.S. and E.U. often have  different standards and regulations, so a Canadian business looking to  sell to both markets can face high upfront costs, potentially even  requiring separate production lines, he said. As a result,  diversification has mostly been theoretical.

But  if Trump is serious about re-shoring American manufacturing by shutting  out imports from Canada and elsewhere, Canadian businesses may find  themselves in a scenario where diversification is an imperative,  Plunkett said.

Export Development Canada, the Crown corporation responsible for promoting Canadian businesses abroad, found in a recent analysis  that many of Canada’s top exports have competitive advantages that  could help reach new markets; specifically, in the area of minerals and  metals, transportation like vehicles and aircraft, fertilizers, wood and  pulp products.

According to the analysis,  minerals could find high-growth markets in Mexico, France, Spain, Japan,  South Korea, Belgium, Switzerland, Malaysia, Türkiye, Ireland and  Colombia, while the agri-food sector has nine potential short-term  market opportunities including the U.K., India, Singapore, Poland,  Belgium, Switzerland, Türkiye, Sweden and Colombia.

John Woodside / Canada’s National Observer / Local Journalism Initiative