Chaos, Economic Security, and Policy Choices
How Canada can respond to Trump tariffs and other quick hits.
With Canada facing imminent tariffs that look set to have deep impacts on businesses and consumers, today I’m going to write about economic security in a changing and utterly chaotic world. Plus, a few quick hits, including on the importance of policy choices in this crazy environment and the publication of a new report written by Orbit Policy.
Defending Canada’s Economic Security
It looks like President Trump is about to impose a blanket 25% tariff on Canadian goods, citing a national security exemption to get around the CUSMA trade agreement. As Gus Van Harten, a professor of trade and investment law at York University, argues, the imposition of tariffs amounts to “a whole policy shift that takes us out of this whole globalization era.” In short, we’re in a new world.
These tariffs will have a profound impact on the Canadian economy, especially when any retaliatory tariffs are taken into account. There is no easy sum to put on this, as this playbook on measuring tariff impacts from RBC Economics ably walks through. Yet, it is very clear that given the tight integration of the North American economy and Canada’s dependence on bilateral trade with the US, we are in for an incredibly rocky ride.
Are we ready for this in any way, shape or form for these tariffs and this new world?
That’s a complicated one to answer. I think it breaks down into two sets of issues.
The Initial Response
The first is the actual response to tariffs, with an eye to having them removed. The federal government has promised a “forceful but reasonable immediate response,” including potentially dollar-for-dollar matching tariffs. The government has also tried to respond to the notional reasons for the tariffs, such as through $1.3 billion in new spending on the border. The federal government has also been sending video clips about this new spending to Trump to highlight this.
The problem here is that, in Trump, Canada is dealing with a fundamentally irrational actor who does not grasp some basic economic facts. John Bolton, Trump’s former National Security Advisor, made this clear in a recent interview:
He doesn’t understand tariffs. He doesn’t understand how they work. He thinks we impose big tariffs on Canada. Canadians will pay for it.
He does not understand, although I’ve heard it explained to him in simple words, that the American importer pays the tariff and then tries his best to pass it on to American consumers.
But when you don’t understand how tariffs work, they look pretty attractive.
Along with the border, another of the underlying excuses for tariffs is Canada’s trade deficit. This is another economic concept that Trump just doesn’t get. Keith Johnson for Foreign Policy made the point in 2020, that Trump views “the difference between a country’s imports and exports as something like the balance sheet of a business—more outflows than inflows must be the road to bankruptcy (something Trump is intimately familiar with), so the only path to solvency must be to balance the books by importing less and exporting more.” Yet that is not how trade deficits work, especially for the US when the US dollar is the global reserve currency. Furthermore, tariffs will do nothing to alter trade deficits, which, as Hoa Trinh pointed out in Trump’s first term, will require the US to increase personal savings and lower government deficits, something Trump made worse with his tax cuts.
When you’re dealing with someone on the other side of the negotiating table who doesn’t understand core economic facts, then a rational, measured response isn’t likely to make the difference you would hope. Perhaps doubling down on performative actions, such as the chartering of two Black Hawk helicopters for $5.3 million, is the way to go. Given that illegal border crossings and fentanyl smuggling are, in reality, basically non-issues (a total of 19.5 kg of fentanyl was seized at the Canadian border in 2024 vs 9,570 kg on the Mexican border), those helicopters aren’t likely to make an actual difference to border security. However, if the image of them flying along the 49th parallel is what makes Trump think that Canada is taking it seriously, then hiring another 50 of them would be a bargain compared to the costs of tariffs.
But, even with that, Canada might be unable to convince Trump to remove the tariffs, especially if his misreading of trade deficits is his core complaint. In this case, retaliatory measures, especially if they go beyond targeting goods that are easily substitutable for consumers and manufacturers, might just deepen the pain for Canadian businesses and consumers without getting the US to remove theirs. Dan Ciuriak makes this point, saying there are no grounds for confidence that retaliation “would restore sanity to American trade policy”. Canada really is in between a rock and a hard place when it comes to dealing with someone as irrational as Trump, and we need to be very conscious of that in our response.
The Underlying Question of Economic Security
The second aspect of whether we are prepared for this new reality gets at the underlying question of Canada’s economic security. This is a topic that I don’t think has been treated with the seriousness it should have done over recent years. It is also a question with many facets to it. These include our overdependence on US trade, the rise of China and its implications for Canada and the rest of the world, war and geopolitical challenges that are undermining energy and food security globally, the impacts of conflicts and climate change on supply chains and much much more.
There has been some good writing on different aspects of this recently. I’ve written previously about Ari Van Assche’s and Daniel Schwanen’s report on the Reconfiguration of Global Supply Chains. The Centre for International Governance Innovation has launched a new Canada at Economic War project, with Raquel Garbers publishing a short scene-setting paper. Policy Options had a series on Trade in an era of global insecurity back in the Fall, including some thought-provoking pieces by Jörg Broschek, Laura Dawson, Patrick Leblond, Patricia Goff, Inu Manak and others.
Yet, for all of that, the topic has been peripheral at best to policy-making. Despite the issue of Canada’s economic security and our relationship to the US’s massive economy, being key to the formation of Canada, to our early political history, and being the defining election issue as recently as 1988, it has not been treated with the importance it deserves. Even the recent economic security consultations were relatively rushed, undertaken by a government rapidly approaching the end of its mandate, and with a greater focus on responding to China than to the wider context of Canada’s economic security.
Measures that would strengthen our economic security are ones that have long been ignored or placed on the back burner. Bob Fay for CIGI sets out a solid five-point plan for actions to strengthen our economy and economic security, but they are a who’s who of important but neglected policy areas: removing internal trade barriers, boosting government procurement and using demand-side levers, improving competition policy, protecting Canadian IP and strengthening digital agreements, and increasing policy coherence. Each of these needs greater focus placed on them, even if they will do nothing immediately to lessen the tariff impact.
I’ve made the case before that we are in an economic moment and are witnessing the collapse of the neoliberal consensus. Trump’s actions only accelerate that collapse. We need to be buckled in for a wild ride for what comes next. And we need to be ready to get serious about the work that will need to be put in to navigate through the chaos to a fairer and more prosperous society on the other side.
Quick Hits
Enabling Growth and Resilience: the UK Tech Sector in an Uncertain World - If you excuse some self-promotion, I’m very excited that techUK has just published this new report that I had the pleasure of writing for them that deals with many of these issues of economic security from the perspective of the UK’s tech sector. The report draws on input from techUK’s member companies to shape 21 recommendations to boost the UK’s growth through the tech sector amid global challenges, emphasizing resilience, trade leadership, and strategic investment. It was great fun to work on, and if you are interested in working with me on a project along these lines, then do get in touch. You can just reply to this email or reach me at tom@orbitpolicy.com.
International AI Safety Report: The International Scientific Report on the Safety of Advanced AI - This monster new report that comes out of the UK’s 2023 AI Safety Summit is the work of 96 international AI experts, including a healthy contingent of Canadians, that really gets into the weeds around AI risks and safety. There is a hell of a lot in here that I’ve only skimmed the surface of. But I want to highlight one key finding that I think speaks to a lot of what I argue about the policy choices we face:
AI does not happen to us: choices made by people determine its future. The future of general-purpose AI technology is uncertain, with a wide range of trajectories appearing to be possible even in the near future, including both very positive and very negative outcomes. This uncertainty can evoke fatalism and make AI appear as something that happens to us. But it will be the decisions of societies and governments on how to navigate this uncertainty that determine which path we will take.
Another area we need to get serious in deciding how to navigate uncertainty.
Everything Everywhere All At Once: competition policy and industrial policy choices in an era of structural change - Finally, another piece that touches on policy choice. This academic paper by the economist Diane Coyle reflects on the revival of industrial policy and new activism in competition policy in light of “technological transformations that are reshaping economic structures and hence presenting policy-makers with long-run supply-side economic challenges.” In light of this, Coyle argues that “the structural changes in the economy being brought about by technological transformations involve normative choices, not just positive analysis.” Coyle concludes that there are “two fundamental unsolved institutional challenges: how to combine expert analysis with political legitimacy when the positive and normative aspects of policy decisions cannot be separated; and how to coordinate policies across bodies whose responsibilities or remits may sometimes conflict”. These questions get to the heart of how we can respond to these difficult and changing circumstances and bring about the policy coherence that is so necessary.