VIDEO Canada can afford to stick out its escalating trade fight with the United States rather than accept a bad deal since time may ultimately favour the country despite the economic imbalance, says former Canadian ambassador to the United States Frank McKenna .
“Time is on our side,” the former New Brunswick premier said. “It’s not good for investors. It’s not good for consumer confidence. But the wait is just as painful for the United States as it is for Canada. And Canadians have a high level of resolve.”
McKenna, deputy chair of TD Bank Financial Group, pointed to Canada’s fiscal position, higher revenues and continued investment as reasons the country has room to absorb more economic damage.
The trade fight escalated again Tuesday when Canadian counter-tariffs took effect on $27.6-billion worth of U.S. goods, matching the 50 per cent the U.S. tariffs levied last month. U.S. President Donald Trump responded by outlining plans to ban imports of certain Canadian alcohol, dairy and other products starting Sept. 29.
He also expanded the range of Canadian goods subject to the U.S.’s 50 per cent tariffs and directed that $50-billion worth of Canadian products be stripped from major U.S. government procurement contracts.
Paul Beaudry , a professor at the University of British Columbia’s Vancouver School of Economics and former deputy governor of the Bank of Canada, also said Canada can withstand a prolonged dispute, but the costs will be greater for the country because it depends far more heavily on trade with the U.S.
“It’s not like the economy is collapsing through these tariffs,” he said. “It’s kind of like a hard adjustment.”
Despite that imbalance, Beaudry does not believe giving ground is the better option.
“Waiting it out is, at this point, the right approach,” he said. “If someone’s trying to push you around, sometimes you just have to stand up to it.”
Beaudry said the tariffs are hitting industries such as autos, steel and aluminum the hardest, but those industries represent a relatively small share of the overall economy. For example, motor vehicle and parts manufacturing and primary metal manufacturing together account for roughly 1.5 per cent of the country’s economy, according to Statistics Canada.
But the longer the uncertainty persists, the greater the potential consequences for investment, particularly in the auto sector, he said, with some automakers already reconsidering or postponing investment plans in Canada.
Despite that uncertainty, McKenna said the substantive differences separating the two countries are relatively narrow and most trade remains uncontentious, he said, with autos emerging as the biggest unresolved economic issue.
The divide centres on how much auto production remains in Canada as the Trump administration pushes to shift more manufacturing to the U.S., while Canada seeks to preserve its share of the integrated North American industry.
McKenna said Canada isn’t seeking an outsized share of North American auto production. The country produces only about nine per cent of North America’s automobiles, he said, while Canadian consumers buy roughly two million vehicles a year.
“We don’t want more than our share,” he said. “But even the auto sector would say that a fully integrated market would result in Mexico, Canada, United States all having a share.”
Beaudry is doubtful the auto sector will return to the highly integrated, largely tariff-free arrangement that existed before the dispute and predicts some form of tariffs will almost certainly remain.
“The auto industry is one of the ones that is in the most difficult positions because the Trump administration really, really cares about trying to bring back more of the auto industry into the U.S.,” he said. “There’s no great outcome out of that one for the car industry.”
McKenna said Canada has more powerful retaliatory measures available if the dispute deteriorates, including export taxes or restrictions on resources such as oil and potash, but he doesn’t believe they should be used now.
“Everything should be on the table, which doesn’t mean that everything should be used,” he said.
Beaudry said measures targeting energy could impose significant costs on the U.S. and provoke domestic pressure as prices rise, but they would also represent a major escalation and could prompt Trump to retaliate further.
“I don’t think it should be out of the question,” he said. “It has to be there as a potential threat.”
Both ultimately expect the two countries to return to the negotiating table. McKenna said mounting public pressure in the U.S., particularly over affordability, could eventually translate into pressure from Congress to bring Washington back to negotiations.
“Once Congress gets a spine, the president will be on the defensive,” he said, pointing to the possibility that the midterm elections could change the balance of power in Congress.
Beaudry isn’t confident an agreement will be reached before year-end, but said there’s a good chance the relationship could be in a better place within a year.
“It could get a lot worse before it gets better,” he said.
There are difficult questions beyond tariffs, McKenna said, including whether a new trade agreement would be binding, how disputes would be resolved and how much freedom Canada would retain to negotiate trade deals with other countries.
Canada should not “negotiate against ourselves” without getting something meaningful and durable in return, he said, describing the challenge of negotiating a deal that is effectively “written in pencil.”
Beaudry said that uncertainty is potentially one of the trade dispute’s most lasting economic consequences. Trade agreements are intended to give companies certainty, he said, but businesses may now have to consider whether Washington could simply change the terms again.
“The hard part now is to guess what a deal means,” he said. “Does this mean in one year it can change again?”
In the end, McKenna expects the two countries to eventually reach a compromise.
“I don’t think there’ll be a clean win,” he said.
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