This article originally appeared in The Hub.
By Fen Osler Hampson and Tim Sargent, February 25, 2025
The Ides of March will soon be upon us and it’s not looking good. President Donald Trump’s 25 percent tariffs will fall like an axe on March 4th unless by some miracle we get a stay of execution. The pleas of Canada’s premiers and federal officials who recently pounded the streets of Washington in a blizzard were met with polite indifference by the generally low-level White House officials and the Congressional B-team with whom they met. We should prepare for and expect the worst.
As with any bully, the real question you have to ask is, “Can he really do anything to hurt us beyond bombast and insults?” The answer is “yes, he can hurt us”—but not fatally, and Trump’s ability to inflict pain and threaten us further will soon diminish.
Tariffs won’t turn us into the 51st state
Twenty-five percent tariffs (50 percent in the case of steel and aluminum because of stacking) would be extremely painful and drive Canada’s economy into a severe recession, perhaps shrinking GDP by 4 percent or more. Still, they will not destroy the Canadian economy, which has faced such threats before, or lead to a stampede to become the 51st state, which Canadians have repeatedly said that they do not want. (Americans are also lukewarm to the idea).
Canada’s economy experienced what would be similar levels of economic pain during the COVID lockdown, but we successfully soldiered on. If Ottawa is successful in getting the provinces to remove key interprovincial barriers to trade and, at the same time, beef up spending to fix Canada’s creaky critical infrastructure—roads, rail, pipelines, ports and airports, electricity grids, etc.—these measures could offset some of the damage Trump is about to inflict upon on.
Trump has limited economic leverage
Trump assumes that it is foreign producers who pay all the cost of tariffs. Not true—for products like aluminum, where the U.S. has limited domestic capacity and supply is inelastic, it is U.S. consumers who will pay the freight.
To bring us to our knees, Trump would have to go from tariffs to primary sanctions or outright trade restrictions on Canadian exports. However, such action would be counterproductive and drive the price of commodities and capital and intermediary goods through the roof while costing U.S. consumers heavily, much more so than his proposed tariffs.
Trump could also resort to financial sanctions, such as limiting the provision of financial services and Canadian access to U.S. financial markets. He might try to prevent Canadian companies from doing business in the U.S. or with the U.S. government.
However, the consequences of financial sanctions for Wall Street and the knock-on effect on global financial and equity markets would be devastating. Canadian banks and our pension and mutual funds are some of the biggest players in the world, not to mention major equity holders in the U.S. Many Canadian companies and investment dealers are registered to trade U.S. securities. Other foreign companies fearing the same treatment would pull out of the U.S. The capital flight from the U.S. would be instantaneous and massive.
Trump may be impulsive and reckless, but he is not suicidal. Short of an outright military invasion, which his advisors have ruled out, Trump’s economic leverage on Canada and his capacity to threaten our sovereignty are ultimately limited.
Americans have to feel the pain before Trump negotiates
Americans will have to feel the pain (along with us) before Trump decides to sit down at the negotiating table. That may come sooner than later because inflation is coming to the rescue.
The latest figures show that inflation in the U.S. has risen to 3 percent, and the Federal Reserve will not lower interest rates until it sees inflation coming down. As Trump and Congress move to cut business and personal income taxes, one of his key election promises, the U.S. federal deficit will increase. That, too, will stoke inflation. The much-ballyhooed DOGE cuts won’t make a serious dent in the U.S. deficit unless Trump cuts social security and other entitlement programs—which are political dynamite (even for Republicans).
Trump will eventually have to backtrack on tariffs for the simple reason he won the election on the promise that he would lower prices and create jobs. His self-contradictory tariffs will drive the U.S. economy in the opposite direction. As every bona fide economist is now pointing out, tariffs will fuel inflation and throw tens of thousands of Americans out of work, including in key manufacturing sectors like autos, as the CEO of Ford recently warned.
How should Canada respond?
The key point here is that while we should anticipate tariffs, we probably shouldn’t assume that they’ll be in place for the long term. When Trump and his fellow Republicans decide to stop pummeling us with tariffs because they finally realize that their knock-on impact on inflation and unemployment will hurt them at the polls in mid-term elections, Canada has to be ready to sit down at the negotiating table.
Our starting position should be directed at eliminating all tariffs on Canadian commodities or capital and intermediate goods exported to the U.S. We must frame the narrative so that Trump understands that Canada is critical to lowering inflation—his bête noire and the Republicans’ Achilles heel—and job creation.
Our commodities and intermediate and capital goods, including key sectors like autos, are also critical to Trump’s MAGA goal to rebuild America’s manufacturing capacity.
We need to hammer home repeatedly that America gets our commodities and goods at a much better price than anywhere else in the world because of our proximity and lower production costs. In an increasingly dangerous world, where security of supply is paramount, there is also no more secure and reliable supplier than America’s northern neighbour.
Show Trump we are on board with his principle of reciprocity
As part of our new border management initiatives, we also need to provide Trump with tangible evidence that not only are we in control of our borders when it comes to illegal migration and fentanyl but that we are also not a conduit for countries like China, who may use Canada to dump steel and other goods onto the U.S. market.
When it comes to non-tariff barriers like, for example, Canada’s supply management policies in agriculture, we should also invoke Trump’s principle of reciprocity. We would move to reduce such subsidies to agriculture if Americans who also subsidize their agriculture agree to do the same.
At the same time, we should agree with Trump that allowing finished goods from other countries, including China, which are often heavily subsidized, is not beneficial for either of our economies when they damage our industrial base. We should agree to follow his example by imposing our own reciprocal tariffs—as we have on Chinese electric vehicles—especially on countries that don’t play by the rules and undercut Canadian producers and manufacturers, thus strengthening North America’s economic security perimeter.
Though some Canadian politicians are playing “Chicken Little” to frighten Canadian voters in an election season for partisan gain, the sky will not fall if we play our cards right, focus on what Trump can actually do to us, and not be distracted by his bluster and bombast. As with any game of poker, there are times when you have to be prepared to call the other side’s bluff. We should also recognize that with each passing day, time and the reaction of markets are on our side and so too eventually will Americans as they feel Trump’s inflationary pain.
Fen Osler Hampson is the Chancellor’s Professor & Professor of International Affairs at Carleton University.
Tim Sargent is a Senior Fellow and the Director of the Domestic Policy Program at the Macdonald-Laurier Institute, and Distinguished Fellow at the Centre for International Governance Innovation.
