As the Trump presidency proved on a range of bilateral files from weaponized tariffs to NAFTA negotiations that pushed U.S.-Canada relations to their worst point since the War of 1812, per former US Trade Representative Robert Lighthizer, American elections matter to Canada’s economy. Former Clerk of the Privy Council Kevin Lynch and former White House economic aide Paul Deegan provide a primer on how to limit the risks.

Kevin Lynch and Paul Deegan

August 24, 2023

As America careens toward one of the most consequential elections in its history on November 5, 2024, Canadians are more than casual observers of the chaos – the likelihood is that we will be rocked politically and economically by any electoral upheaval next door.

As we look to the 2024 presidential and congressional election campaign now underway, there are several core economic policy questions that Canadians will expect their governments and business leaders to address seriously and begin to plan for, given the deeply intertwined nature of our bilateral relationship.

The pre-election status quo: Canada and the new American industrial policy

Industrial policy in the United States is as old as the Republic itself. Alexander Hamilton argued that, “The public purse must supply the deficiency of private resource. In what can it be so useful as in prompting and improving the efforts of industry?”

In 2016, candidate Donald Trump astutely tapped into concerns about the loss of American manufacturing jobs, but once in the Oval Office his only response was to blame trade agreements and impose a smattering of tariffs, including on allies such as Canada and Europe.

The fear of losing the advanced technology race to China and the havoc caused by global supply chain disruptions arising from the pandemic and the Russian invasion of Ukraine led to a major pivot toward industrial policy by the Biden administration. The new US industrial policy has multiple aims: securing leadership in key technologies including AI, quantum and advanced microchips; rebuilding America’s advanced manufacturing capacity and its high-paying jobs; and kick-starting the industrial transition to a carbon-free economy.

For Canadian governments and businesses, this presents both opportunities and challenges. What is clear is that Canada cannot out-subsidize the US, so we have to pick our interventions strategically and surgically. Time will tell whether the $30 billion- plus subsidies to Volkswagen and Stellantis create a sustainable competitive advantage for Canada in the rapidly emerging battery field and pay off for workers, communities, and taxpayers. But one thing is certain, a few investments, where we are paying top dollar to compete with US jurisdictions for plants, doesn’t constitute a Canadian industrial strategy.

Shouldn’t we be developing the concept of a “Team North America” approach to EV supply chains and production, predicated on the simple assumption that the main competitor, and risk, is China, not other states and provinces and that we are more competitive as an integrated and dynamic bloc rather than a hodgepodge of local markets competing for subsidies. The Auto Pact of the 1960s was a brilliant example of industrial policy that worked well for both countries. For both Canada and the US, duelling industrial policies are a recipe for a costly cross-border race to the bottom.

How should Canada prepare for renewed US protectionism and trade impediments?

Whether it is Biden, Trump, or someone else in the Oval Office in 2024, one thing is for certain: an America First stance will prevail. Since 2016, the US has walked away from its policy of opening up global markets in favour of defending American companies and workers who have seen manufacturing jobs disappear from low wage foreign competitors and from technological change.

The Trudeau government, to its credit, was able to secure the updated North American Free Trade Agreement (NAFTA) or Canada-United States-Mexico Agreement (CUSMA). The mandated 2026 review of the CUSMA will be a key agenda item for the new American administration and congress, and a key risk for Canadian governments and business.

Rather than painfully negotiate a shrinking of the USMCA, as many “progressive” Democrats and MAGA Republicans would advocate, why not build the case for its geographic expansion – a Free Trade Area of the Americas – an idea that has been around since the 1994 Summit of the Americas. In addition to offsetting China’s hemispheric influence and expanding markets for industries in Canada, the US, and Mexico, it would benefit the US by creating jobs in a region that is driving undocumented workers to America. Wouldn’t a hemispheric approach to trade, with safeguards for workers and the environment, be in America’s economic and well as national security interests?

What is a viable Canadian technology strategy given the reach of US tech titans?   

Leadership in advanced technology as essential for both America’s security and competitiveness. Semiconductors are an example, where the US, once the world leader, now depends on Taiwan, which produces about 60 per cent of the world’s semiconductors and about 90 per cent of the most advanced chips. To reduce its overreliance on one nation for supply and the risks of Chinese interference disrupting world supply chains, the Biden administration launched the CHIPS and Science Act in 2022 to expand domestic research and manufacturing of chips. The goal for Canada should be not to try to compete, but to complement the US strategy and ensure we are not excluded.

More broadly, the US government has a complex relationship with digital technology. It worries about the monopolistic proclivities of the digital tech titans, about data privacy rights and about cybersecurity but wants to be the global leader in AI. Canada will have to develop strategic partners within the US and work with allies such as the UK and EU to ensure a voice in the setting of digital rules and protocols.

What should a robust Canadian clean energy plan be in the face of US energy policy uncertainty?

While the Republicans seem are devoid of a clean energy plan, Biden has set the ambitious goal of reaching 100 per cent carbon pollution-free electricity by 2035 through tax credits, grants, and loan guarantees but absent a carbon tax of any form. Time will tell if that goal is achievable, given push-back from “red states” and a less-than-supportive Congress.

Canadian energy policy is a complex mix of carbon taxes, regulations and myriad micro-interventions. What is not talked about much by the federal government is the scope for small modular reactors (SMRs) and carbon capture and storage (CCS) to facilitate the energy transition and the ability to tap our massive potential from hydro. To play offence, we need to ask the question: how can we speed up approvals for new projects and become a net exporter of clean energy to North America? To build flexibility in the face of American energy policy uncertainty, we need to consider what it would take to become a global supplier of “cleaner and safer” LNG just as the US is doing now.

The 2024 Presidential election is shaping up to be one of the most bitter and divisive in US history. For Canada, now is the time to redouble our efforts to strengthen cross-border relationships in the public and private sectors – just as we did over NAFTA in 2016. It is also the time to do some serious policy planning and scenario analysis of possible responses as Canada faces home grown challenges of poor productivity, weak competitiveness, tepid growth in per-capita GDP and rapidly rising government debt.

In the Federalist Papers, Alexander Hamilton wrote, “The process of election affords a moral certainty, that the office of President will never fall to the lot of any man who is not in an eminent degree endowed with the requisite qualifications.” That proposition has already been tested. We’ll see whether it can withstand another assault.

Hon. Kevin Lynch was Clerk of the Privy Council and vice chair of BMO Financial Group. Paul Deegan was a public affairs executive at BMO and CN. He served in the Clinton White House.