A fleeting sigh of relief
THE CANADIAN PRESS
Donald Trump’s inauguration on Monday brought a fleeting sigh of relief for Canada following reports that we might avoid an immediate trade war with the U.S.—a conflict that would plunge our economy into recession and fuel fresh inflationary pressures.
Early in the day, multiple news organizations reported that instead of imposing tariffs, Trump planned to direct U.S. federal agencies to scrutinize trade practices involving Canada, Mexico, and China. Yet, by evening, as Trump signed executive orders in the Oval Office, he told reporters he was still considering a 25% tariff on Canadian and Mexican goods starting February 1.
The threat of chaos remains, leaving Canada on edge.
Let’s hope those remarks were merely more bluster. For Canada, a cooling-off period would represent the best-case scenario, buying critical time for both our economy and policymakers.
First, it allows the Canadian economy more breathing room to recover from its recent slump, as the effects of lower borrowing costs begin to take hold. On Monday, Bank of Canada survey data underscored how the macroeconomic environment is starting to positively influence business and consumer confidence. While sentiment remains “subdued”, businesses are increasingly optimistic about their sales potential and investment outlook. Consumers, too, are reporting improved financial health and sentiment.
This recovery is poised to gain momentum as the Bank of Canada continues its rate-cutting trajectory, with another reduction likely on the horizon next week.
Second, Canadian policymakers need more time to craft a sophisticated and coherent strategy to address Trump’s trade concerns and avoid a damaging trade war. The Canadian government has signaled its readiness to retaliate against any U.S. tariffs with countermeasures designed to impact the American economy. While this posture may make sense as a negotiating tactic, it is unlikely to be credible in practice.
As David Rosenberg pointed out in a Bloomberg News interview, Canada relies on exports to the U.S. for 20% of its GDP, while exports to Canada account for a mere 1.2% of U.S. GDP. In such an uneven fight, retaliatory tariffs would likely hurt Canada more than they would harm the U.S. To prevail in this scenario, Canada would need extraordinary national resolve—a level of unity that is far from guaranteed.
Trump’s fundamental economic goal is to shift consumption toward U.S.-produced goods and services. For Canada, the challenge is clear: we must develop a strategy to align with this objective while protecting our economic interests.
