The trade war is ending. We just don’t know it yet

Jeff Mahon is director of geopolitical and international business advisory at consulting firm StrategyCorp.

The trade war with the U.S. has moved into the trenches. With tit-for-tat tariffs and a suite of measures from the federal government offering billions in support of affected businesses, the conflict has devolved into a battle of attrition: How long can President Donald Trump withstand domestic political pressure vis-à-vis Ottawa’s ability to eat the costs of trade war before businesses reliant on the U.S. market shut down or implement mass layoffs.

Canada seems to have the upper hand at the moment as our country’s instinct to defend itself is felt as existential amongst a broad swath of Canadians, whereas Mr. Trump is already feeling heat from Americans over affordability and from other policy fumbles.

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On Tuesday, the United States unveiled retaliatory-retaliatory tariffs – that is, tariffs in response to Canada’s retaliatory tariffs that took effect Sept. 8 – that hit the Canadian liquor industry hard but otherwise seemed oddly muted. Washington even rolled back some existing tariffs.

The Carney government made the right move by walking away from negotiations last month. But despite the brinksmanship and the lashing out by U.S. administration officials in the media, there is a silver lining stemming from this development: A zone of compromise has begun to take shape.

Canada has laid down markers of what it is and isn’t willing to accept. Mr. Carney’s three specific reasons for ending negotiations have revealed three broader dimensions that the negotiations are focused on: market access, domestic and foreign policy. At some point the conflict will have to move out of trenches and back to the negotiation table. Thinking through these three dimensions can help clarify our objectives and judgement as to what an acceptable deal could look like.

On market access, while the U.S. 50-per-cent tariffs on a subset of Canadian exports that were first announced on July 20 may appear to be the strategic priority, they are really just a tactical manoeuvre that was designed to drag Canada to the negotiation table. This coercive threat did work insofar as it kick-started serious negotiations, but the primary focus is the Section 232 sectoral tariffs.

These tariffs were motivated by the U.S.’s desire to reshore and restructure certain manufacturing sectors (steel, automotive, forestry, etc.). They threaten to be much more durable and would do considerable harm to Canadian industrial capacity. The Trump TACO phenomenon has not applied here to date, hence why Canada was originally willing to accept some element of U.S. restriction.

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However, the talks that fell apart last month appeared to give Canada too little in market access; and the Trump administration was looking to levy maximum cost. They wanted Canada to cede domestic and foreign policymaking space to American direction.

On the domestic front, Mr. Carney cited French language and cultural protections but also Trade Representative Jamieson Greer’s insistence on “digital alignment” being part of the interim deal. Given the far-reaching impacts of the technological revolution under way and the growing concentration of power in Silicon Valley, loss of autonomy in the digital space would’ve subjugated Canada to U.S. frameworks. Should Canada lock itself into not only allowing U.S. tech companies unfettered access but also restrict Canada’s ability to determine how it will procure hardware, infrastructure and regulate data storage, then Canada’s future sovereignty and prosperity would be undermined.

The U.S. push to limit Canada’s ability to freely enter into trade agreements is clearly part of the foreign policy dimension. This risk was prefigured by Mr. Greer alluding to “economic security commitments” when announcing the framework of a possible interim agreement. This sovereignty-limiting precedent was established last October when the U.S. began including economic security provisions into their reciprocal trade deals, which required partners to align trade actions against third countries at the U.S.’s request.

In rejecting this subjugation, however, Mr. Carney revealed that Canada is willing to work together on such alignment if Canada deems it in our interest to do so. Indeed, the concept of an economic Fortress North America previously endorsed by Mr. Carney would require such external alignment on key sectors. Canada signalled that it is willing to co-operate here, but that it will not allow itself to be so blatantly commanded as this would cripple Canada’s trade diversification and diplomatic posture.

The task for Canada now is how to maximize its market access while making some concessions on the other two dimensions without undermining its core sovereign autonomy. Indeed, such has always been the case with trade negotiations. However, the onslaught of trade attacks and annexation taunts from a barbarian leader to the south has made Canada obsessed with the word “sovereignty” while concurrently obfuscating its meaning. All trade agreements cede some ground here by binding their signatories to certain protocols.

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The Trump administration’s behaviour has called into question the reliability of any deal and thus has done a great disservice to civilized diplomacy, which has long held pacta sunt servanda – agreements must be kept – as a pillar. But at the same time, we shouldn’t get too carried away here either. It matters which time scale of agreement we are referring to.

The post-Second World War economic and security bargain that the U.S. made with the Western world had run its course. Moreover, with less than 5 per cent of the world’s population, the U.S. accounts for roughly one-third of global consumption. This is an unsustainable situation that requires some reordering of the terms of market access, particularly amid a period of geopolitical rebalancing. However, Mr. Trump’s coercive and childish approach is counterproductive to forging long-term co-operation with Canada, its closest partner.

With the collapse of negotiations, the two sides have retreated to the trenches. Canada must resolve to ignore each new eruption coming out of the White House and instead continue attempting to persuade the U.S. that co-operation is the true path to prosperity and security.