Worrying less about Trump is Canada’s best negotiating position
THE CANADIAN PRESS/AP-Alex Brandon
Ottawa is gripped with apprehension about the election of Donald Trump.
Much like in other capitals around the world (including Washington), we’ve seen the rise of a kind of Trumpology—trying to interpret intentions, scrutinize cabinet choices, decipher past statements, parse the signals. Which is only natural.
Canadians have a lot at stake economically, so it’s important for stakeholders and policy makers to map out potential outcomes and worry about and prepare for really bad scenarios.
But it’s also important to assign realistic probabilities to these outcomes, which will only strengthen our negotiating position. As Derek Burney reminded us in a column published in The Hub this week, hysteria is an unhelpful response to Trump.
My argument here is that there’s probably less likelihood of Trump dramatically disrupting our bilateral trade than some people fear, though there are big risks for certain industries.
Here is what we know.
Trump is preoccupied with trade deficits and so we can expect his incoming administration to rely heavily on tariffs (or threats of tariffs) to reduce the size of the U.S. trade gap. This has been made crystal clear.
The worst case scenario for Canada is a blanket 10% increase in tariffs on goods going into the U.S., as Trump has already threatened. (Fine: he can also just rip up the North American trade pact). But a blanket tariff with Canada isn’t in the U.S.’s best economic interests. We’re a major exporter of energy and other raw materials to America—and taxing these imports would only drive up the cost of core inputs needed for Trump’s push to reindustrialize his nation.
The most probable outcome is that our natural resources will be exempt from any new trade action. This isn’t a controversial take.
The Americans are likely to take a more tactical approach, with tariffs applied to sectors where the U.S. really wants to drive domestic production—which has the added benefit for Trump of being very transactional. Here’s how Trump’s nominee for Commerce Secretary Howard Lutnick put it in a September interview with CNBC: “Tariffs are an amazing tool by the president to use. But he understands, don’t tariff stuff we don’t make.”
Tiny surpluses
What does all this boil down to for Canada?
For one thing, Canada’s trade surplus with the U.S. isn’t particularly attention-grabbing even when we include our resource exports.
The Americans ran a merchandise trade deficit of USD$46 billion with Canada in the first nine months of 2024, or just 5% of the U.S.’s total trade gap with the world, according to the latest U.S. data. Their merchandise trade gap with Canada is one-third the size and one-fifth the size of their deficits with Mexico and China, respectively. Add services trade, where the U.S. actually runs a surplus with us, and the overall trade deficit with Canada shrinks by about half. That’s relatively tiny.
The U.S. also runs a surplus with Canada in advanced technologies that have been a key focus for policy makers in Washington, while running large deficits in these products with much of the rest of the world including Mexico and China.
When removing raw materials from the equation, the grounds for contention shrink even more dramatically.
I pivot to Canadian customs data here which has more detail. It shows energy and other raw materials account for about 90% of the U.S.’s merchandise trade deficit with Canada. It’s tough to see Trump getting excited about a non-resource Canadian trade gap that is measured in a few billion dollars. Even if he does, blanket tariffs seem a blunt tool to orchestrate a small swing in the trade balance.
That does not mean he won’t zero in on large, sector-specific trade deficits. This is actually the most likely approach. While the overall trade balance is small, the headline number masks large imbalances within sectors—some favor Canada and others favour the U.S.
Vulnerable sectors
Which sectors are vulnerable?
Wood product manufacturing runs large surpluses—about $14 billion over the past 12 months based on Canadian customs data. The U.S. already imposes special tariffs on this sector, which ironically may insulate it. But there’s worry it could be hit with more.
Food manufacturing is another big one, with a $21 billion surplus over the past 12 months using Canadian customs data. Apparently, Canada is a major exporter of chocolate to the U.S.
Some have suggested the automotive industry is at risk, though trade in that sector is largely balanced when auto parts are taken into account.
Primary metal manufacturing - things like steel and aluminum - is another potentially vulnerable sector, running a surplus of $22 billion over the past year, according to Canadian customs data.
Just one final footnote to end this analysis. While Means & Ways is arguing that the worst case scenario is a low probability one, it won’t feel that way. Trump has an incentive to create maximum uncertainty about his intentions because it maximizes his negotiating power. This means two things:
He WILL threaten heavy tariffs and disruption even if he doesn’t mean it
He’s unlikely to move as quickly as some think
Uncertainty and chaos are powerful tools in negotiations and will naturally force countries like Canada to worry about worst-case scenarios. The greater the concern about terrible outcomes, the greater the temptation to seek insurance against those outcomes with quick concessions to avoid punitive tariffs.
I believe we’re already seeing a bit of this in the suggestions by some politicians about potentially abandoning Mexico and negotiating a separate stand-alone trade agreement with the U.S. Canadians shouldn’t be so eager to rip up our existing trade agreement even before Trump takes office.
Hysteria won’t help us one bit.
