Donald Trump addressing the World Economic Forum 2025/AP

This is the second piece in our Policy Special Series from the Expert Group on Canada-US Relations addressing economic threats from the new Trump administration.

With thanks to the Expert Group co-chairs Perrin Beatty and Fen Hampson, to Carleton University’s Norman Paterson School of International Affairs, and to the Canadian Global Affairs Institute.

By John M Weekes

January 23, 2025

Canada faces a very uncertain economic future as President Donald Trump threatens to impose 25% tariffs on all Canadian imports. These threats and any moves to actually impose tariffs undermine the attractiveness of Canada as a site for investment, particularly for manufactured goods. Indeed, it would seem that is exactly what Donald Trump would like to do.

In a virtual presentation January 23 to the World Economic Forum annual meeting in Davos Switzerland, President Trump said: “If you don’t make your product in America, which is your prerogative, then very simply you will have to pay a tariff, differing amounts, but a tariff which will direct hundreds of billions of dollars, even trillions of dollars, into our treasury to strengthen our economy and pay down debt.”

“Under the Trump administration, there will be no better place on earth to create jobs, build factories or grow a company than right here in the good old USA.”

An investment chill has already descended across the Canadian economy as investors wait to see what actually happens before determining whether to proceed.

For the last 75 years, Canadians have assumed that they would have predictable access to the United States market, first under the GATT (the General Agreement on Tariffs and Trade), subsequently the WTO (World Trade Organization) and also under successive free trade agreements with the United States (now the CUSMA). Imposition of the threatened tariffs would be a violation of these agreements. In other words, the administration of Donald Trump’s  would be thumbing its nose at international law created through various trade agreements of which the United States has been a principal architect and beneficiary.

The question is, what should Canada do in this unprecedented situation? The federal government and the provinces are seeking desperately to try to persuade the Americans not to proceed and to withdraw these threats. Solid arguments have so far been deployed, explaining that Canada is not the problem, that both Americans and Canadians benefit from open trade, and that Canada is prepared to address a variety of concerns that President Trump has identified including immigration and cross-border movement of fentanyl. These efforts have so far proved ineffective, indicating that the stated rationale is not the point, and the coercion is.

A chill has already descended across the Canadian economy as investors wait to see what actually happens before determining whether to proceed.

Canadian leaders have also threatened the United States with countermeasures to offset possible American tariffs. The hope would be that such countermeasures would encourage the United States to pursue a negotiated resolution to the situation in order to avoid damage to American economic interests, which would inflict political pain inside the United States. A key problem with this approach is that Canada, heavily dependent on trade, is much more vulnerable than United States in any retaliatory exchange. From an economic perspective, retaliating against all American imports would be as damaging to the Canadian economy as the original American tariffs.

Canada should continue to try to find a beneficial accommodation with the United States but we cannot count on these efforts achieving success. Indeed, for the first time in some 80 years, it may well be that such efforts will not be successful.

Accordingly, Canada needs to look urgently at other ways of strengthening Canadian economic prospects, to restore confidence in Canada, and to rekindle investment. It will be necessary to make significant changes in a number of current Canadian policies and to seek common political ground between the federal government and the provinces and among political parties. This is a critical moment and it requires an extraordinary response.

The objective would be to strengthen the Canadian economy and to take better advantage of foreign markets already opened up by trade agreements such as the CPTPP, which includes Japan, and the CETA with the members of the EU. It would be prudent for the time being at least to not put more emphasis on the manufacturing sector which figures most prominently in Trump’s crosshairs.

Obviously, achieving such a change would be a major undertaking well beyond the scope of this space. But some of the elements that should be included are:

• Work to eliminate interprovincial barriers to trade which is currently on the agenda of Canada’s first ministers.
• Move quickly to enable Canada to become an energy and natural resource export powerhouse, including in the area of critical minerals.
• Such an approach would need to involve major changes to Canadian regulations to facilitate new infrastructure and resource projects and to reduce current restrictions on the production and export of oil and gas.
• Pursue the approach proposed recently by the Business Council of Canada for strengthening the defence industrial industry in Canada.
• Ensure that the policy environment for the internationally exposed and export-oriented service industry in Canada is conducive to the development and competitiveness of strong players. Part of this could be eliminating the digital services tax that has caused so much friction with the U.S.
• Create conditions to facilitate development of a globally competitive AI industry in Canada along the lines envisaged by Ontario Treasury Board President Caroline Mulroney in a December 21 article in the National Post.

We are facing a once-in-a-lifetime challenge that requires an all-hands-on deck approach to mitigating disaster and strengthening Canada for the future. It might even be possible to use Trump’s aggressive behaviour as a catalyst to put our own domestic house in order.

John Weekes, who was Canada’s chief negotiator for the original NAFTA, is a member of the Expert Group on Canada-U.S. Relations, and a fellow of the Canadian Global Affairs Institute.