What a trade war with the U.S. will feel like
THE CANADIAN PRESS
Before we dive into what a trade war with the U.S. could mean for Canada, let me take you back to some fond memories from the 1970s.
Picture this: the whole family piling into the station wagon, kids crammed into the back, heading about an hour south for a shopping trip across the border. For Montrealers like my family, the destination was Plattsburgh. Many Canadian families had a similar ritual.
The trip was always exciting. The malls, restaurants and gas stations seemed familiar but somehow different—Bubblicious gum, Cocoa Pebbles cereal, Tab cola, even Budweiser. All the things we’d see advertised on American TV but couldn’t find at home.
It was a time when tariffs, regulatory restrictions and less-integrated economies made cross-border shopping feel exotic, at least to my 12 year-old self. Over the past four decades, much of that “border effect” has faded—diluted by the deeper integration that has taken place.
This trip down memory lane highlights a key point: the benefits of open trade and deeper integration largely accrue to consumers. We get greater choice and access to cheaper imports that effectively increases our purchasing power.
It’s no coincidence that since Canada signed its first free-trade deal with the U.S. in 1988, the share of our GDP devoted to consumption has grown from 50% to almost 57% today.
Thinking about those Plattsburgh roadtrips also helps frame the three potential paths Canada could take as we brace for Trump 2.0 and a more inward-looking U.S.
Option 1: Becoming more self-sufficient
The first path is toward becoming more self-sufficient ourselves. What this would look like in a world of financial and technological hyperconnectivity is hard to say, but one thing is sure: we’ll be poorer.
There’s the immediate hit from any large blanket tariffs that will cause a major recession and a fresh bout of inflation - the dreaded stagflation. Over the long-term, the economy will adjust by shifting resources away from sectors that trade with the U.S. toward producers that cater to the domestic economy. The border effects will thicken and we’ll export and import less as a share of the economy. Prices will be higher, our economy will be less productive and our growth potential lower.
On the flip side, our industrial base might grow over time as newly protected sectors emerge to replace expensive imports. This could provide the kind of resilience that policymakers increasingly value, but it would come at a steep cost to consumers and the broader economy.
Option 2: More trade diversification
The second path is toward trade diversification away from the U.S. Politicians will champion this idea in the weeks to come, but history suggests it’s easier said than done. We just haven’t been good at exporting anywhere else.
Despite now having free trade agreements with over 50 countries, Canada’s export performance has been lackluster. Since 2000, export volumes have grown by just 1.5% annually—the second-worst among advanced economies. Over the last decade, that figure dropped to 1.4%.
We continue to rely on the U.S. for three quarters of our merchandise exports.
Why have our exporters struggled? Living next to the world’s largest economy has made it easy for Canadian companies to focus south of the border. We’ve lost our competitive edge, and diversifying trade will require overcoming significant inertia. So, temper your expectations when you hear politicians champion this path.
Option 3: Deeper integration with the U.S.
Which brings us to the third option: deeper integration with the U.S.
It may be hard to believe this is even a possibility in the current environment, amid talk of trade wars and potentially a new wave of anti-American sentiment.
But given the adjustment costs of becoming more self-reliant and the dubious prospects for diversification, this may even be the most likely option. And it will mean conceding more to Trump than we’d like.
Trump’s vision of trade—as a privilege rather than a mutual benefit—implies that maintaining access to the U.S. market will come at a cost.
Think of Trump charging something like a membership fee for the privilege of trading with America. A modern-day tribute system.
What would such a “price of admission” look like? It could be anything from the 25% blanket tariffs he’s threatening to more targeted protectionist measures. Or it could be calls for deeper integration — a customs union perhaps, or even annexation. The only option not available, at least rhetorically, is the status quo.
There is a very wide binary set of potential threats coming from Trump—tariffs or union, marriage or rivalry.
The one thing both outcomes have in common, however, is that they will drive more spending toward U.S. production - whether from American consumers through tariffs or Canadian consumers through deeper integration.
Trump’s fundamental economic policy objective, as economists such as Michael Pettis have pointed out, is to shift more resources toward U.S. production. That’s the lens through which we should view his focus on trade deficits and tariffs.
If we want to maintain privileged access to the U.S. market, in other words, we will need to find ways to consume more goods and services from the U.S., and less from other nations.
The idea of a customs or economic union with the U.S. has surfaced periodically, but it remains deeply controversial in Canada—understandably so. It means forfeiting a lot of sovereignty.
The stakes are massive and the situation requires difficult choices and a clear-eyed assessment of what we’re willing to give up to preserve what we’ve gained.
Any trade agreement, like the ones we already have, inherently involves ceding some control over policy. Often, we willingly align our policies with the U.S. on issues ranging from trade to defence—and beyond. Canada’s recent alignment with the U.S. on China is a prime example.
But the key word here is willingly.
