By Hendrik Brakel
January 28, 2025
Executive Summary
Canada urgently needs a new trade policy and a strategy to work with President Donald Trump. This is the worst possible time for Canada to be adrift, suffering as it is from a complete absence of federal leadership. As Trump ratchets up his tariff threats (first 10 percent, now at 25 percent), his rhetoric about the 51st state, executive orders for an America First Trade Policy, and his musings about annexing Canada, the federal government has checked out.
Prime Minister Justin Trudeau has already resigned and is awaiting his replacement while Canada’s Parliament is closed down until March 24, so the Prime Minister is not able to confront a tariff crisis with significant new spending, supports for business, or added security measures. All he can do is tweet indignantly, threaten retaliatory tariffs, deliver speeches (lamenting Kamala Harris’s loss and declaring himself a “feminist” (Tasker 2024), and convene meetings. His government will be fortunate to last more than a few weeks after the reopening of Parliament: his party trails the Conservatives by 25 percent, there are at least two confidence votes imminent, and the opposition parties are all promising to bring down the government at the earliest opportunity.
The crisis can only get worse in the months ahead with a rudderless Canada unable to respond and a trade-focused U.S. president sensing weakness.
The most likely scenario is that when a new government takes office in May, it will have to move swiftly to develop a new trade policy and a strategy to work productively with Trump. This is a tall order to be sure, but it’s not all bad news. Canada currently has a tremendous opportunity to overhaul its trade policy, improve economic and border security (things it should be doing anyway), and lock in advantages on energy, innovation, and investment.
With a thoughtful strategy, Canada could benefit from a closer economic union with the world’s most dynamic advanced economy – a tighter relationship that could yield improved trade and investment, stronger innovation, and greater productivity. However, if this opportunity is mishandled, the economic consequences could be devastating. Deloitte estimates the impact of the U.S. imposing 25 percent tariffs on Canada will be a loss of $275 billion in Canada’s real GDP from 2025 to 2030 with 222,000 fewer jobs on average over the period (Deloitte 2024).
A 21st century Canadian trade policy must be based around three principles:
1. As a first step, secure “Fortress North America.” Canada and the U.S. should move from a trade agreement to a broader and closer economic union (the free movement of goods, services, investment, and with some exceptions, people) that includes mutual regulatory recognition as well as reciprocal treatment of tax incentives and procurement. It should also include a security and military co-operation agreement, recognizing that economic security and the overall relationship is vastly more important than trade grievances. The U.S. has always prioritized security above trade and every G-7 statement reinforces that economic security is now a paramount global concern.
2. Make Canada the best place in the world in which to invest and build a business. This will require dramatically reduced taxes and the development of an industrial policy for strategic industries. Industrial policy should not be seen as a bunch of subsidies for favored industries. Instead, Canada’s industrial policy should include a major overhaul of its patchwork of regulations and tax policies that are now making it hard to do business there: Canada must lower taxes and lower energy costs, make regulations business-friendly, create better incentives for R&D, make real investments in the supply chain and infrastructure, and improve competitiveness. The Trump administration will cut taxes and regulation drastically, so Canada must move aggressively to avoid being left at worsening competitive disadvantage.
3. The global trade system cannot function with countries that flout global trade rules and abuse the system – China’s trade surplus reached a record high of $1 trillion in 2024, and the growing imbalances are stressing manufacturers in countries around the world. It’s time to forge alliances to crack down on China or see the collapse of the global system as other countries retreat into protectionism.
This report contains specific policies and recommendations to achieve these objectives. The final issue is how to package all of this in the immediate term so that no president, not even Trump, would want to impose tariffs on a critical ally like Canada. Canada must offer these policies from a position of strength, via a credible government that will deliver on its promises (no more vague assurances that have no follow-through), and they must include real tangible benefits that are a win-win for Canada and the United States.
Here the biggest challenge is Canada’s federal leadership. A lame duck prime minister and a paralyzed Parliament is a recipe for disaster. Only a new Canadian prime minister with a new mandate can completely change the narrative and perceptions of Canada in Washington, D.C. The problem of U.S. perceptions of Canada is fixable, but it requires bold new policies and a change at the top.
Read the full paper here:
