Canada has secured a one-month pause in the 25% tariffs threatened by Donald Trump/Shutterstock

By Tim Sargent and Fen Osler Hampson

February 3, 2025

While Donald Trump has now agreed to a 30-day pause on his threatened 25% tariffs against Canada, that threat remains active, now linked to a vague “economic deal” per his social media post on the subject.

The iron laws of economics and US politics will eventually defeat Trump’s use of tariffs against Canada, Mexico, and China. But it will take time, and Canada has much to do to get its house in order to avoid being such a tempting target for our neighborhood bully. As Sun Tzu said in The Art of War, “To secure ourselves against defeat lies in our own hands.”

Trump claims that tariffs would allow him to achieve three ambitious policy objectives simultaneously: 1.) eliminate illegal immigration and the cross-border fentanyl trade; 2.) solve America’s fiscal problems by raising enough revenue to cut their astronomical deficit while extending and deepening the Trump 1.0 tax cuts; and 3.) rebuild US manufacturing strength by reshoring industries such as autos and steel.

But, as so many experts in all of the above fields and no less a credible source than The Wall Street Journal have pointed out, much of this is pie in the sky, and Trump’s chances of achieving any such goals via a trade war against his two North American neighbours and China are slim.

Illegal migrants will cross the border if businesses are willing to employ them. Drugs, including fentanyl, will flow as long as there are consumers to buy them. If Trump succeeds in levying tariffs, Mexico, which is the primary source of illegal migrants and drugs, would have no incentive to curb these flows: quite the opposite.

Would tariffs alleviate US budget and fiscal pressures?

The short answer is, not much. The US budget deficit in 2023 was 6% of GDP. Total imports were only 14.1% of GDP, and imports from China, Mexico, and Canada were less than 40%, for a total of 5.3% of GDP. According to our calculations, Trump’s tariffs would only raise around 1% of GDP, which is not enough to make a significant dent in the deficit or pay for extending the tax cuts, around 1.5% of GDP. And this all assumes people wouldn’t substitute away from imports, which they almost certainly would. The bottom line is that the US doesn’t import enough to make tariffs a significant source of revenue.

Why is the US manufacturing sector in decline?

The real reason is automation and the unwillingness of Americans to do repetitive manufacturing jobs. This has much more to do with the decline of employment in the US manufacturing sector than competition from cheaper-wage countries like Mexico, Canada, or China. The impact of tariffs in the case of China, for example, will be offset by Beijing’s managed exchange rates as they drop the price of the renminbi. The wage differential with Mexico is too large for even a 25% tariff to make much difference. Canada’s trade with the US in autos, for instance, is mainly balanced.

Would Trump’s tariffs hurt Americans?

The short answer is yes, in more ways than one. Tariffs are a circular firing squad and would inflict pain on American producers and consumers who import goods, commodities, and natural resources from Canada, Mexico, and China. Not only would prices rise sharply, often in unpredictable ways, given the deep integration among the three economies, but we could also see supply disruptions reminiscent of COVID as some suppliers become uneconomical and disputes over who initially pays the tariffs mount.

Even without retaliation, US exporters, including in the agricultural sector, would be hit as the US dollar rises, key customers in Mexico and Canada would become less able to afford US exports, and the price of inputs such as fertilizer would increase.

Americans would also see a hit to their pensions from the tariff war

The stock market was already reacting unfavourably to what would be a significant blow to the profitability of large US companies. This would go directly to the value of Americans’ retirement savings, i.e., their 401(k) defined contribution plans.

Just as Trump cannot repeal the laws of economics, he cannot repeal the laws of US politics

Trump is now a one-term president: he cannot run again without a change in the constitution; furthermore, he is not a young man. He has a razor-thin majority in the House of Representatives, and the 2026 midterms are less than two years away.

This means that time is not on Trump’s side: as the pain of his tariffs would mount, so would the noise and pushback from different corners of the US political system. Americans are not noted for their stoicism regarding their immediate economic interests, especially when the government takes money out of their pocketbooks, as tariffs would.

But difficult days lie ahead for Canada

None of the above means there aren’t difficult days ahead for Canada. Make no mistake, we are being singled out because we are perceived as small, weak, and free riders on America’s security coattails.

We are small—less than one 10th the size of the US economy—and we are weak: many years of political complacency have weakened our economy, our defences, and even our sense of nationhood.

To get through this, we must become strong and smart.

Dollar-for-dollar, counter-tariffs to Trump’s would not be a viable response

Retaliating in kind to Trump would mean playing the game according to his rules, which is just what he wants.

Because we are so much more dependent on trade with the US than they are with us—exports to the US account for about a quarter of our economy versus 1.6% for the US—we would never win a tit-for-tat trade war for the simple reasons the Americans have clear escalation dominance. This is unlike the steel and aluminum spat of 2018, when the battle was just about one sector.

Furthermore, we would risk blurring the signal. The American public must understand that tariffs are a flawed policy not in their self-interest. Retaliation by us would simply make it much easier for Trump to appeal to American patriotism and portray this as an economic war instead of an act of economic self-harm.

Most importantly, would tariffs hurt us as much as the US by raising prices and distorting decisions. We should simply not accept Trump’s deeply flawed economic meme that tariffs are a cost-free policy tool.

That does not mean that there aren’t tactics other than tariffs that we could use. For example, one of the things the US has pushed hard for in trade deals is protections for IP in areas such as pharmaceuticals and copyright, where large US companies rake in billions from Canadian consumers. If the US no longer wants to live up to these trade deals, we must ask ourselves whether these protections must be as strong.

But the most important thing we must do is make Canada strong again. We must put aside policy distractions and focus on building our core strengths. Specifically:

• We must free-up our over-regulated resource sector and invoke national security to build pipelines East and West rapidly
• We must refashion our bloated and inefficient governments and radically reform our tax systems to encourage investment, innovation, and work effort
• We must reinvest in our military to be taken seriously again as an ally. We should prioritize the Arctic’s defense so that no one, including the US, doubts that we can defend our sovereignty.

Above all, we need to rediscover our sense of nationhood. Trump’s gibes about making Canada the 51ststate touch a nerve precisely because our sense of national unity and collective purpose has not been tested since the 1995 Quebec referendum, three decades ago. Trump thinks we are ripe for the plucking. We can and will prove him wrong.

Tim Sargent is Director of Domestic Policy and Senior Fellow at the Macdonald-Laurier Institute in Ottawa. He was Deputy Minister of Trade during the renegotiation of NAFTA during the first Trump administration.

Fen Osler Hampson, FRSC, is the Chancellor’s Professor and Professor of International Affairs at Carleton University, and President of the World Refugee & Migration Council. He is the former Director of Carleton’s School of International Affairs and author and co-editor of some 48 books on international affairs.