
Trump, Tariffs and Trade
Key findings
- President Trump’s economic strategy pushes private investment into the United States by using threats and uncertainty to encourage companies to relocate their operations within U.S. borders.
- Canada’s economy faces massive risks if U.S. tariffs are implemented, especially on key sectors like autos, where tariffs could devastate industries and stall recent electric vehicle investments.
- Canadian politicians should take a strategic, measured approach to negotiations.
- Canada must boost defense spending to meet NATO targets, a costly but strategic move that can also support economic growth through military procurement and innovation.
- Instead of competing with the United States for manufacturing, Canada should focus on its strengths in the knowledge economy—professional services like finance, engineering, and AI—which continue to show robust growth.
- A comprehensive tax reform strategy is needed to level the playing field with the United States and make Canada more competitive for private investment, particularly in the tech and R&D sectors.
- Canada should take advantage of this protectionist threats to eliminate interprovincial trade barriers and create a more unified internal market that can boost productivity and strengthen economic resilience.
A huuuge trade dilemma
The more we hear from President Trump, the more his strategy becomes clear: force private investment to flow into the United States. If you want to sell to U.S. consumers, then you’d better be producing those products within the U.S. borders.
To achieve this, Trump must push against market forces that have globalized supply chains over the past few decades. This globalization has given American households access to high-quality products at lower prices, boosting their purchasing power while lifting incomes in developing economies supplying these goods—a win-win scenario.
However, Trump rejects this perspective, viewing trade as a zero-sum game. If countries like China, Canada, or Mexico benefit from trading with the United States, he argues, then America must be losing out. This flawed belief underpins his obsession with trade deficits, which he equates to subsidies paid to other countries at the expense of U.S. households.
These views are false, protectionism will erode America’s competitiveness on the global stage, sustain inefficient industry at a cost to U.S. consumers, and erode the purchasing power of Americans. History will repeat. Examples of failed protectionist policies are common in economic history books.
Aiming to bring investment home and make America great
The strategy is simple, bullying, and effective: use threats and uncertainty to push private investment into the United States. And it’s been working since 2016—even before his presidency officially began—when he threatened to dissolve NAFTA. For Canadian firms, the risk of losing access to U.S. consumers was too great. Many opted to shift production south of the border rather than risk tariffs or other restrictions.
The impact on Canada has been significant. Private investment in productive capital has been stagnant since 2015. While the oil price crash that year initially drove this decline, investment in other sectors has failed to recover over nearly a decade. In 2024, Canada’s non-residential business investment stood at just 10.7 per cent of GDP, compared to 14.9 per cent in the United States—a persistent and worrying gap. Given that private investment drives future production, job creation, and economic prosperity, this trend is deeply troubling.
Trump’s tactics largely relied on threats rather than action. While some tariffs were implemented during his first term, the renegotiated trade deal, touted as “the best deal ever,” looked remarkably similar to the original NAFTA. The uncertainty alone was enough to chill Canadian investment.
Since 2021, the Biden administration has added massive subsidies under the CHIPS Act and the Inflation Reduction Act (IRA) to Trump-era protectionist policies. These measures have further incentivized U.S.-based investment. Now, Trump is doubling down, adding subsidies, new tariff threats, and promises of low taxes to lure more investment. In this environment, Canada faces an uphill battle to attract private investment without significant policy action.
But there’s a hiccup in Trump’s plan
This time around, Trump faces a significant obstacle. According to the Congressional Budget Office, in the fiscal year ending September 30, 2025, the federal deficit in the United States will reach $1.9 trillion, or 6.2 per cent of GDP, while total federal debt will hit 99.9 per cent of GDP.
The pandemic left many developed economies grappling with massive sovereign debt, and the United States is no exception. Despite this, the U.S. government continues to run sizable deficits. Bond markets are now demanding higher yields, increasing the burden of swelling government debt. Addressing this issue is unavoidable.
Trump’s plan involves cutting the federal public service while using tariffs as a potential revenue stream. With tax hikes seemingly off the table, tariffs could become a key tool in his approach.
The tariff threat is real
President Trump cannot impose significant tariffs without harming the U.S. economy. An important barometer will be American equity markets. Tariffs on oil or other resources would hurt U.S. competitiveness and drive up inflation, reducing household spending and corporate profits—outcomes that are likely to unsettle stock markets.
So far, the threat of tariffs has only caused minor ripples in the markets, but applying a solid tariff to Canadian imports would result in a sizeable drop, especially if there is a sense that tariffs will last. Still, our sense is that President Trump will make good on his threat. At some point, we will wake up to the news that tariffs are applied, perhaps not blanket and likely below the threatened 25 per cent level.
Tariffs on energy or other raw materials make no sense, even if President Trump suggests the United States doesn’t need Canadian resources. Such measures would harm both countries, but the United States would face longer-term consequences, paying higher prices for critical inputs. Canadian industries would adjust by securing alternative markets, eventually mitigating the initial export hit.
In contrast, tariffs on manufactured goods pose a more serious threat to Canada. For example, a 25 per cent tariff on autos would devastate Canada’s motor vehicle and parts industry, with long-lasting repercussions. This would jeopardize recent investments in electric vehicles and battery production, amplifying the damage to a key sector of the Canadian economy.
The end game
Ultimately, any tariffs imposed on U.S. imports from Canada are likely to be temporary, limited in scope, and set below the threatened 25 per cent level. Trump’s strategy will likely focus on extracting concessions. Canada may be pressured to increase border security spending and raise defense spending to meet the NATO target of 2 per cent of GDP.
The 2026 renewal of CUSMA will bring further challenges. Expect Trump to intensify his focus on Canada’s protected dairy industry, a perennial sticking point in trade negotiations.
We’re in for a tough two years, most likely four. However, careful negotiation and strategic planning can help Canada weather these pressures.
We need a united front North of the Border
Dealing with a bully is never easy, and Canada’s initial response to Trump’s tactics was far from ideal. Throwing Mexico under the bus at the first hint of tariffs was a mistake. Similarly, the flurry of contradictory announcements about potential countermeasures from various levels of government only added to the confusion.
More recently, federal and regional leaders have aligned on a more coordinated approach, which is a step in the right direction. Applying counter-tariffs targeted at U.S. industries reliant on Canadian exports, or restricting resource sector exports, may help pressure the U.S. administration, even if such measures come at a cost domestically. Ultimately, negotiations with the U.S. will require bargaining chips, and given the severity of the threats we face, no option should be off the table.
Prepare to commit to elevated defense spending
The United States spends 3.5 per cent of its GDP on defense and accounts for nearly 70 per cent of total NATO spending. Canada’s spending on defense is at 1.3 per cent of our GDP, well below our NATO commitment of 2.0 per cent. While we used to be a laggard among many, in recent years, many NATO members have ramped up their spending to reach or surpass the target. Canada clearly stands out as a laggard.
The shortfall is a key bargaining chip for the U.S. administration to use against Canada. Closing the gap to 2 per cent would be costly—an additional $22 billion this year—but ramping up spending could have positive economic consequences.
Military procurement comes with rules that forces supplies to be sourced in Canada, such that the knock-on effects on the economy and jobs would be substantial. Moreover, investing in military technology is another venue for bolstering public sector R&D spending, which can often lead to private sector applications. Canada could also be strategic in meeting its defense spending targets by channeling current committed public sector R&D funds into the defense category.
Focus on our strengths
While the U.S. administration seems focused on boosting manufacturing, Canada has comparative advantages in other areas, including professional services. Canadians are globally competitive and prospering in the knowledge economy.
While investment is lagging in other areas, private investment in research and development is trending positively, and software investment has posted robust gains since 2018. Since 2015, employment and output in high-paying professional services industries has been growing at more than double the national pace. Canada’s exports of commercial services—spanning fields like engineering, finance, and insurance—have grown by nearly 9 per cent annually since 2016. These exports now account for 12.5 per cent of the country’s total exports.
The rapid adoption of cloud-based technologies and artificial intelligence holds promise for Canada’s future productivity in these industries. Encouraging investments in these areas is likely to pay greater dividends, than competing with the United States for manufacturing investment dollars.
Canada’s strengths also extend to its natural resources, including energy, agriculture, and agri-food production. However, resource sector investments are often hindered by the length and complexity of environmental review processes. These processes, which involve federal, provincial, territorial governments, and Indigenous communities, are not necessarily constrained by strict regulations but by prolonged timelines that create uncertainty. Streamlining these reviews without compromising rigorous standards would position Canada more effectively as a destination for resource sector investment.
We need to level the playing field
Competing with the United States on taxes will be challenging, especially if Canada aims to avoid running similarly sized deficits. However, a comprehensive approach to tax reform—aimed at leveling the playing field with the United States—is long overdue and may go a long way to help rekindle investment in Canada.
The U.S. government’s tax cuts, implemented in late 2017, significantly improved its corporate tax competitiveness. This has created a noticeable gap in effective tax rates between the two countries, which, in turn, has contributed to a similar gap in investment levels.
But it’s not just corporate taxes that are hindering investment in Canada. High personal income taxes also reduce the incentive for individuals to commercialize new products at home. Instead, many choose to take their innovations to the United States, where the tax environment is more conducive to entrepreneurial success.
Nothing unites like a common threat
While trade flows smoothly between Canada and the United States, trade between provinces and territories is hindered by a complex web of non-tariff regulations, restrictions, and procurement policies. These barriers prevent Canadian firms from competing effectively across the country. Although there has been progress in addressing these issues, accelerating the removal of these internal trade barriers would significantly boost Canada’s productivity and prosperity.
The potential disruptions to Canada’s exports to the United States, coupled with the possibility of retaliatory tariffs, have pushed provincial governments to refocus on eliminating interprovincial trade barriers. This long-standing issue—an embarrassing problem that our confederation has been unable to tackle—may finally gain the attention it deserves in the face of external pressures.
Will a common threat finally help us gain a common market? We have previously advocated for adopting mutual recognition agreements, akin to Australia’s successful approach, to facilitate the flow of goods, services, and labour within Canada. This framework entails each jurisdiction recognizing regulations from others, even if they differ from their own.
If the threats from Trump finally help us accelerate the move to a unified internal market, that would be a welcome outcome that would help us get through this rough uncertain passage but also lift our prosperity for years to come.
See our previous commentary on Donald Trump’s 25 per cent tariff threat.
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