Trudeau’s trade pivot: from courting China to deepening U.S. dependency
THE CANADIAN PRESS/Adrian Wyld
On his first official trip to China in 2016, Trudeau pledged to double bilateral trade within a decade.
It wasn’t too long ago we were in exploratory talks with China on a free trade agreement. Now, almost exactly four years after those talks were officially put to bed, the federal government has begun imposing its most extensive set of new tariffs against the Asian power in decades.
This week, Canada introduced a 100 per cent levy on electric vehicles imported from China, and starting later this month, will apply a 25 per cent surtax to a wide range of aluminum and steel products. The government is also considering further surtaxes on batteries, battery components, semiconductors, solar products and critical minerals. Consultations on these measures conclude next week.
Chrystia Freeland, once a staunch opponent of the growing wave of protectionism, now finds herself in the role of protectionist.
“We are moving in lock-step with key international partners to protect Canadian workers and businesses,” the finance minister said this week. “Canada is taking decisive action to level the playing field and protect Canadian workers and investments in Canadian industry.” (Italics are my own.)
Freeland's change of tune reflects the changing times. Growing tensions between western democracies and China are fragmenting the global economy and drawing us closer to the U.S. Emerging industrial policies are reshaping our economies. And, as inflation cools, the issue of affordability is diminishing as a major political driver.
The tougher Chinese tariffs reflect a number of economic and political developments that are worth exploring:
1. Canada's trade independence is shrinking.
There’s no escaping the gravitational pull of the U.S. economy and trade policy. While we may be “moving in lockstep” with international allies, it’s the U.S. that primarily dictates Canada’s trade posture. As the global economy fragments, our ability to pursue independent trade policies diminishes. Look for the shift toward “friendshoring”—forging deeper ties with trusted partners while reducing reliance on geopolitical adversaries like China and Russia—to accelerate.
Canada's dependency on the U.S. is deepening. So far this decade, over 75 per cent of our exports have gone to the U.S., slightly higher than the previous decade. While that may not seem like a dramatic change, it marks a reversal of the diversification trend we saw between the early 2000s and 2010s, when the share of Canadian exports to the U.S. dropped by over 10 percentage points.
2. The desire for closer trade ties with China has evaporated.
When Justin Trudeau came to power in 2015, China was at the heart of his government’s trade diplomacy, with exploratory talks of a free trade deal underway. On his first official trip to China in 2016, Trudeau pledged to double bilateral trade within a decade. While trade between the two countries did grow, it fell far short of that lofty goal, rising only about 50 per cent since his visit. China’s share of Canada’s total trade is now hovering at 5.8 per cent, well below record levels in the immediate aftermath of the pandemic and about where it was a decade ago.
The truth is, the economic rapprochement with China had barely gotten off the ground before it ran into trouble, with relations starting to sour as early as Trudeau’s second visit in late 2017, when the Chinese rebuffed Canada’s demands for labour, gender and environmental guarantees in any trade pact. Soon after that, Trudeau shot down a $1.2 billion bid by a Chinese construction firm for Aecon Group Inc., citing advice from national security agencies. That was quickly followed by the arrest of Huawei’s chief financial officer in Vancouver, and the detention of two Canadians by Beijing. The rest is history.
3. There are second-order consequences of industrial policy.
The tariffs on Chinese cars, of course, are meant to PROTECT Canada’s nascent electric vehicle industry, which is currently under construction by the state.
Federal and provincial governments have committed around $50 billion to developing a domestic EV supply chain, which made it almost inevitable the government would look to protect that investment.
But these protectionist measures come with second-order effects: like making electric vehicles more expensive, for one. Higher EV prices will slow Canada’s transition to a greener economy.
And China will retaliate. In the past, Chinese reprisals have often targeted Canadian exports like canola. Other resource-based sectors, such as forestry and fertilizers, are also vulnerable. British Columbia, given its proximity to China, stands to lose the most in any escalation.
Moreover, Canadian financial institutions, asset managers and pension funds that have business interests in China could also get hurt. It’s a reminder that industrial policy creates both winners and losers.
The Royal Bank of Canada released an excellent report on the impacts of the tariffs last month. It’s well worth a read.
4. Affordability is not the only issue
As inflation eases to more normal levels, other policy priorities are gaining ground. This will likely be a dominant theme in 2025, or at least after the next federal election. Issues like climate transition, the development of made-in-Canada industries, the need to mobilize investment and geopolitical strategies will compete for attention alongside affordability, which is still by far the number one concern of the electorate.
But the tariffs Canada has imposed—despite their potential to raise prices for consumers—illustrate how the policy agenda going forward will be a lot broader than the current political discourse suggests.
