Canada’s new global strategy hits a Trump wall. Something has to give

WASHINGTON, D.C. — Prime Minister Mark Carney told the world at Davos last week that Canada is building strength at home amid a rupture in globalization and positioning itself as a middle power that similar nations can trust to be a responsible leader in the diplomatic arena.

In short, the technocrat extraordinaire portrayed Canada as guided by values like human rights and sovereignty, encouraging other middle powers to build resiliency in this new world order.

The speech came just days after Carney forged a “strategic partnership” with China’s Xi Jinping to reduce Canada’s 100 per cent tariffs on Chinese EVs to just 6.1 per cent while China agreed to cut its canola tariffs from 85 to 15 per cent — a deal that President Donald Trump initially said was a good idea.

Carney’s words played well in the Swiss Alps and at home, where anti-Americanism is rife, thanks to Trump’s “51st state” rhetoric and his compulsion to refer to the prime minister as “governor.” But the well-crafted speech also poked the bear. Trump responded by chiding Carney in his own Davos address and then, over the weekend, he took to social media to post a threat: “Should Canada finalize a deal with China, it will face an immediate 100% tariff on all Canadian goods and products entering the U.S.”

There is a pattern emerging with Trump’s threats, with international panic followed by eventual climbdowns, but 100 per cent tariffs would be catastrophic for Canada — and Carney’s team is eager to keep the Canada-U.S.-Mexico Agreement (CUSMA) alive. So many are wondering how seriously to take Trump’s warning. 

“The question for Canada is which threats do you take seriously and which do you sit out,” said Inu Manak, senior fellow for international trade at the Council on Foreign Relations.

100 per cent or nothing?

Manak sees Trump’s threat as a personal reaction — a “bit of a tantrum” — to Carney’s Davos speech, but she also thinks it’s more bluster than a thought-out policy shift.

The only mechanism Trump has that would enable him to impose such duties is the International Emergency Economic Powers Act, and the Supreme Court is expected to rule against that in the coming weeks.

Thomas Duesterberg, a trade expert and senior fellow at the Washington-based Hudson Institute, agrees that the IEEPA authority will soon be struck down. “Any other attempt to impose those sorts of tariffs,” he said, “will have to go through some process that will take time.” 

Duesterberg was referring to the White House invoking Section 301 of the Trade Act of 1974, which can be used to investigate suspected unfair foreign trade practices and respond with tariffs. 

“It normally takes nine to 12 months to even bring a case, then do the background study, and take testimony from interested parties, including foreign parties that are affected,” he added.

Still, Duesterberg and Andrew Hale, a fellow at Washington-based Advancing American Freedom, think Carney made a big mistake in giving that speech at Davos.

Hale suggested that Carney took a page out of former prime minister Justin Trudeau’s playbook and, instead, should have been more strategic with his timing. 

“I felt by doing that speech at Davos, he was pulling a Justin Trudeau. And if I were him, I would’ve held back from that … I feel that he should have maybe balanced this better, given the fact that it was clearly not going to be well received by President Trump.”

Duesterberg was even more critical, noting that “insulting Trump is not part of … good diplomacy.” 

The speech and Carney’s intent are still being debated, with U.S. Treasury Secretary Scott Bessent claiming on Monday that Carney had walked back his Davos comments on a recent call with Trump. Carney strongly denied this on Tuesday. 

But Duesterberg also questioned Carney’s forging links to China.

“I don’t know how [Carney] expects a mercantilist power like China to be a good market for Canadian goods, especially if he alienates Trump and if it has repercussions on keeping USMCA going past this coming year.”

But could a narrow deal with China really lead to Trump blowing up NAFTA’s successor — the one his first administration deemed was the “gold standard” of trade deals?

To be or not to be … an FTA

Bessent clarified on Sunday that Trump’s threat was specifically over the prospect of Canada pursuing a full free trade agreement with China.

Carney has clearly stated he’s not pursuing this, but trade experts disagree on whether the narrow deal forged with China would qualify as an FTA in Trump’s mind.

“[The current deals] do not really rise to the level of a free trade agreement,” said Manak, and Bessent’s walkback seemed to chime with this interpretation. 

“If what Carney signed with the Chinese counts as a trade agreement, then what are we to make of what Trump agreed to last year with the Chinese?” Manak offered, referring to Xi agreeing to lower soybean tariffs and Trump’s reduction of the so-called “fentanyl tariffs.”

But Duesterberg disagreed. 

“As I understand what Carney’s trying to do, it amounts to some sort of trade preferences. I don’t know what the WTO definition [of an FTA] is — 80 or 90 per cent of all trade — and maybe it’s not that, but in the eyes of Trump, in the eyes of probably more of the trade experts in the United States, it’s a form of a trade agreement.”

If Trump deems Carney’s dealings with China as anything approaching an FTA, in other words, it could lead to the U.S. pullout from CUSMA, as Article 32.10 of the agreement targets FTAs with “non-market economies,” allowing for parties to terminate the agreement.

So, while Trump’s threat of 100 per cent tariffs is highly unlikely, especially in the short term, experts say the bigger risk is to CUSMA, the review of which is set to begin this summer.

Few of them expected the review to go smoothly before this latest flare-up, but now some are fearing the worst.

It’s the CUSMA, stupid  

“[The review] is going to be bad no matter what,” said Manak. “It’s going to be an awful process.”

Hale, in suggesting Carney take a more balanced diplomatic approach to Trump, agreed.

“Trump’s going to basically make it difficult right up until the final hour of that review process,” he said.

Duesterberg said the Carney-China overture will probably complicate the CUSMA review, unless Canada can smooth things over before then — namely by backing down on cooperation with Beijing. 

This, he suggests, would mean engaging Trump on mutual economic gripes, such as the longstanding U.S.-Canada timber disputes and dairy access concerns. 

Duesterberg noted that Trump has shown flexibility with Europe, Japan, Korea, and Indonesia, stressing that the president will compromise.

But Manak is concerned that some of the U.S. demands, especially during the CUSMA talks, may go too far. 

“I’m sure there’s going to be some pretty shocking asks,” she said.

Manak is concerned that the White House will demand higher rules of origin, meaning a requirement for an increased amount of North American content, and not just for automobiles, but across all products.

Duesterberg said he expects there to be pressure targeting the supply management system for dairy.

Pushing Canada to adopt U.S. tariffs, investment screening, and other protectionist rules against China may also be part of the U.S. administration’s agenda. Manak said the push for mirrored anti-China tariffs could be something the U.S. insists upon in CUSMA language.

Clark Packard, a research fellow in the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute, said Canada and Mexico also have points to make about the U.S.’s eroding of parts of the agreement over the past year — namely, the Section 232 metal tariffs.

Packard and most experts say that Trump’s volatile behaviour makes navigating — much less predicting — the CUSMA review process difficult.

In Trump’s second term, said Hale, “he’s certainly more hostile. He’s certainly more erratic.”

Duesterberg also said Trump “doesn’t have the most compelling, coherent, and comprehensive trade policy” and that it can feel more “ad hoc.”  

But there is consistency in one area, Duesterberg said, and that is in “what he’s trying to do overall under the rubric of rebalancing and pushing back against China.”

Packard suggested that Carney was perhaps playing “4D chess” with his China deal in a bid to gain leverage in future CUSMA talks, but he also pointed out that Canada’s pivot to China was a “direct consequence of the Trump administration taking Canada, Mexico, and USMCA for granted.”

Canada and Mexico, being far more export-dependent than the U.S., have a lot more to lose than the U.S., with any gutting of CUSMA. But by compromising close allies in trade matters, Washington also loses leverage in how those countries behave and interact with other nations.

“I think the United States has put both countries in a bind,” said Packard. 

And if the Canadian and Mexican governments see CUSMA as a dead letter, Packard said, “I expect both governments to rapidly look to expand trade ties with other parts of the world.”

National Post

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