Front Burner - Trump’s tariffs and the case for Canada

Episode Date: January 22, 2025

Speaking from a cabinet retreat Tuesday, Prime Minister Justin Trudeau made the case for why the Trump administration should divert from the trade war collision course they’re currently on. His comments come just a day after Donald Trump was inaugurated as US president and mused about slapping 25 per cent tariffs on Canadian imports starting Feb. 1st.The Prime Minister went on to say that while the country will continue to negotiate - there are also preparations to fight back including considering dollar for dollar tariffs on American products coming into Canada.Today we are talking to Canadian economist Jim Stanford about the carrot and stick arguments Canadian officials are making to Americans. Stanford is director of the Centre for Future Work and recently published a report asking the question “Who’s Subsidizing Whom?” when it comes to the Canada-U.S. trade relationship.For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcripts

Well, it's safe to say 2025 is off to an interesting start. I'll say. And if you're trying to sort through what's real and what's relevant from a Canadian perspective, we're here for you. Your World Tonight is more than just a recap of daily news. Our team goes deeper on the stories that speak to the moment to give you the full picture. I'm Susan Bonner. I'm Tom Harrington. And I'm Stephanie Scanderas.

Together we bring you the day's news, context, and analysis all in about 25 minutes. Your World Tonight from CBC News. Find and follow us wherever you get your podcasts. This is a CBC Podcast. Hi everybody, Jamie here. Before we get to the show today, I have a favor to ask you. If you wouldn't mind, could you please hit the follow button? It really, really helps us and will definitely make it worth your while because we are going to be all over the upcoming Canadian election and the first hundred days of the Trump presidency. So follow us and don't miss an episode. President Trump said that he wants to usher in a golden age for the United States. That will require more steel and aluminum, more critical minerals, more reliable and

affordable energy, more of everything to run the U.S. economy full steam ahead. Canada has all those resources. That's Prime Minister Justin Trudeau making the case for why the Trump White House should divert from the trade war collision course they're currently on. The alternative for them would be more resources from Russia, China or Venezuela. Canada is a safe, secure and reliable partner in an uncertain world. Trudeau was speaking from a cabinet retreat Tuesday, the day after Trump mused about slapping 25% tariffs on Canadian imports starting February 1st.

The Prime Minister did go on to say that while the country will continue to negotiate, there are also preparations to fight back. I support the principle of dollar-for-dollar matching tariffs. It's something that we are absolutely going to be looking at if that is how they move forward. This is what I want to get into today. What are the carrot and stick arguments Canadian officials are making to Americans? I'm talking with Canadian economist Jim Stanford. He's the head of the Center for Future Work and recently published a report asking the question,

who is subsidizing whom when it comes to the Canadian-U.S. trade relationship? Jim, hey, welcome back to the show. It's always great to have you. I feel likewise. Jamie, thanks for having me. Jim, hey, welcome back to the show. It's always great to have you. I feel likewise. Jamie, thanks for having me. Great. So let's start with that question in the Oval Office Monday and Trump's response that he could impose a 25% tear off on all goods from Canada and that it could take effect February

1st. That's just two weeks away. What did you make of all that when you heard it? Well, like 40 million other Canadians, I've got whiplash, Jamie, because of course the day started out better because in his initial executive orders and all that stuff, he didn't mention putting the tariffs on. Instead, he announced that he would instruct US government agencies to study the trade flows between the US and Canada and Mexico and China and so on and report back in April. So, you know, we heaved a sigh of relief for about two hours until Mr. Trump then started blustering again.

Well, we're thinking in terms of 25% on Mexico and Canada because they're allowing vast numbers of people to come in and fentanyl to come in. Are you planning on getting those to that? I think we'll do it February 1st. So it's impossible for us. No one has a microscope into Mr. Trump's brain and how he rolls. He obviously enjoys keeping his opponents off base, you know, with these wild threats. Maybe it's just to create some leverage and try and get some concessions, or maybe he's serious about doing it. We don't know, but unfortunately we have to prepare for the worst here. Right. And I guess either way, here we are, and our officials are

responding to this right now. And I want to really try to understand today what the case is that our people are presenting to the Americans for why this would be bad for us, of course, but why it would be really bad for them to go ahead with this. So Trump has come up with a number of different justifications for the tariffs, but his big one, of course, is his complaint about the U.S. trade deficit with Canada. That deficit was estimated to be around some $ billion dollars, meaning the U.S. imported 40 billion dollars more stuff from Canada than it exported to us. Trump says that

the U.S. is subsidizing us. And just, can you elaborate for me on what we're talking about here when we're talking about subsidies? Sure. Well, in our bilateral trade with the U S which is huge, Jamie, it's a trillion dollars a year of goods and services that flow both ways across the border amidst that huge two way flow. There is a small balance in Canada's favor. It's certainly not $200 billion, which is the number Mr. Trump was throwing around before his inauguration. And you know, he literally just makes these things up.

The number is much smaller. And then there's the question of, well, what does it mean on this huge two-way flow that the Americans buy a bit more from us than they sell to us? And it is absolutely not a subsidy. If anything, we're probably subsidizing them. You make the argument that there are actually these three categories where Canada and Canadians are subsidizing the U.S. economy. They include access to lower cost reliable oil and gas, the importation of U.S. services, and the outflow of Canadian

investment dollars into the U.S. And let's start with oil and gas, shall we? It makes up by far the largest piece of that pie when it comes to Canadian exports to the U.S., amounting to roughly $103 billion in 2023. So what is different or special about Canadian oil and gas exports to the U.S.? Well, obviously, the Americans benefit from the fact that they have access to our energy and all the other stuff that they import. But there are a couple of ways, Jamie, where they've got an especially sweet deal on the energy front that I think does diverge from the normal pattern in

international trade. First of all, we account for a huge share of their total energy. Over half of their oil imports now come from Canada, way, way more than they get from Saudi Arabia or Iraq or anywhere else in the Persian Gulf. So they very much need that energy, but they also get it at a very low price. They get a discounted price on our energy for various reasons. Number one, we're close. Number two, the whole infrastructure in the continental energy system is designed to basically take oil from Canada and pump it down to American refineries and there isn't a whole lot of other places for us to sell it. Then third, there's quality issues. Most of our oil now comes from the oil sands, so it's heavier and harder to refine. So for all those reasons, they get it for cheap. And then another unique thing is as an oil exporting country, Canada is one of the only countries that allows foreign investment and

private investment in its oil sector. So if you go to Saudi Arabia or any of those other countries, you're dealing with a publicly owned company that organizes production and catches the royalties and profits for the public benefit. Canada rightly or wrongly privatized the whole thing. There is no national oil company anymore, and the Americans are in there big time. $55 billion worth of US foreign direct investment in the Canadian oil patch, and that is also unique compared to any other major net oil exporting countries. So not only do they get access to our energy for cheap, they get to own the energy and the production of energy and capture the profits. That, in effect, I would say is a subsidy.

They also make money off refining it, right? Oh, absolutely. You know, again, this just reflects the way that the infrastructure has been built they also make money off refining it, right? Oh, absolutely. You know, again, this just reflects the way that the infrastructure has been built. We now sell over 4 million barrels a day of oil in the US, over half of their total oil imports. And then their refineries can take that, again, for cheap,

and then refine it. Their refineries are set up to use that as their crude input. And then they have become exporters themselves, basically re-exporters, taking our energy for cheap, adding value to it through the refining process, and then selling it to the rest of the world. So again, this idea that they're subsidizing us is quite wrong. This is a uniquely sweet deal in energy supply for the Americans. So if we restricted our energy exports in any sort of way, just tell me more about what would happen in the US. Well their supplies are very much dependent on

Canadian crude, far more so again than any other relationships. You know if there was any kind of serious restrictions on supply, there's no doubt that they'd suffer an oil supply crisis that would make those oil shocks in the 70s really look like child's play. They're far more dependent on Canadian energy now than they've ever been on the Persian Gulf. So, you know, the disruption to the Americans would be very severe. There'd obviously be disruptions in Canada. So there are ways that we could use their dependence on our energy as leverage, but that means we all have to stick together and put up a bit of a united front against

the Americans, and that is proving hard to do. Yes. As we've talked about on the show, there's a split right now between the majority of the premiers, Ottawa and Premier Daniel Smith right now who is you know essentially saying that she's not willing to kind of entertain the idea of restricting Energy exports and that it could cause a national unity crisis turning to your second point You argue that this some 40 billion dollar deficit while it does include goods and services There's actually a lot of stuff we buy from the US that isn't included, that basically does close that gap. And explain that to me. Well, Mr. Trump only talks about merchandise when he's complaining about the trade deficit

with Canada, you know, the stuff that arrives on trucks across the border or container ships or whatever, but that's only part of world trade. Another part of rapidly growing part of world trade is services, where you're doing something for a customer in another country rather than selling them a piece of tangible merchandise. Services trade includes all kinds of things, transportation, tourism, banking, even higher education, for example, when foreign students come to a Canadian university, that's a form of services trade. But the especially lucrative and especially growing part of services trade is digital trade. So just think about data transfers or streaming services or digital platforms like Uber that

organize work over a platform, over a website. These are all ways that those companies, and by the way, the biggest ones are all American, they were all sitting in the front row at Mr. Trump's inauguration, their CEOs were, they clean up in this whole area of cross border services trade, especially anything digital. And the rest of it is absolutely under-reported and under-regulated, frankly. So if we counted the full value of services exports to Canada and the US has a big trade surplus in services, again that's why Mr. Trump never talks about services, then that number would be much smaller and perhaps reverse. But here's how I think they've got a uniquely sweet deal because we can't count these services. It's very hard for government to know

what's crossing the wires, if you like, and we don't regulate it. And for the most part, we don't tax it. So these companies, again, the largest ones in the US, very, very profitable, selling tens of billions of dollars worth of services in Canada with a sweet deal that other businesses don't have access to, namely, being able to operate in a largely tax-free manner because these services aren't on the radar screen yet of Revenue Canada and the other systems. And the companies themselves have got all kinds of opportunities to shift their revenues around to avoid paying taxes in a place like Canada.

Now we and other countries, Europe, Australia, and elsewhere, are trying to get a handle on this, right? We have been proposing different ways to make Google and Meta and Amazon pay at least a little bit of tax in the country that they're selling their services in, rather than the country where they artificially declare their official profits in. So we have this digital services tax that's being proposed in Canada and other ways to

try and regularize the treatment of this growing industry a bit and have them pay a bit towards the society where they're making so much money. No doubt, Mr. Trump and the company CEOs behind him are going to be coming after that digital services tax as a first order of business. They don't want any interference with those American giants and their ability to profit from the internet but without regulation and without taxes. Why are humans so smart and yet so stupid? Is black plastic bad for me or not? Can the United States actually take over Canada? We look at these and all kinds of other big questions on The Current, our award-winning

podcast that brings you stories and conversations to expand your worldview. My name's Matt Galloway. We're gonna look for solutions to wicked problems. We will actually listen to each other and we'll make time to find the delight that exists in our world. You can find The Current wherever you get your podcasts.

We'll talk to you soon. podcasts. We'll talk to you soon. So if I'm Canada and I'm going in and negotiate here, can I use anything here as a bargaining chip? Can I threaten to do something here? Well, on the services trade area, we absolutely could. Now, again, it would be difficult. No one's really figured out how to regulate the internet and how to properly tax the companies that dominate the internet. And that's what we've been trying to do in baby steps, again, like other countries around the world. But Elon Musk and Mark Zuckerberg and the others hate this idea. They don't want any interference. They don't want any government oversight. They don't want any anti-monopoly powers. And they certainly

don't want any taxes. So they are going to be playing hardball, not just with Canada. He is using his leverage as the biggest economic player on the block to try and extract more concessions from these other places in the interest of US business. So again, this is not a charity case. They are not bailing us out. They are profiting from us and now they're using their economic might to ensure that those profits continue. The third prong of your argument is that Canadians and Canadian companies invest heavily in the US, and how much are we talking about here? Well, we have a huge cross-border flow in investment, just like we have a huge cross-border

flow in trade, and like we have a huge cross-border flow in trade, and it goes both ways. Canadians and Canadian banks and Canadian investors and Canadian companies invest a lot in the US, about $5 trillion now placed in the US. By the same token, Americans and American companies and American banks invest a lot in Canada, but the net is in our favor. We own more of America than America owns of Canada, and that's a change from post-war history when it went the other way. So right now, we have about a trillion dollars more in assets in the US than the US has here. Now this is in a way par for the course because when America runs a trade deficit, and they

have run a trade deficit with almost all their trading partners and they've had it for a long time, Jamie, 49 straight years, the US has had a global trade deficit and this year we'll make 50, there's no doubt about it. The only way they can do that is if capital is flowing into the US, that give them the purchasing power to basically pay for all that stuff. And the reason capital keeps flowing into the US year in and year out is it's the center of global financial capitalism and investors and banks and even governments around the world want to hold US assets, whether it's government bonds or stocks or property or

anything else. So this ongoing capital inflow to the US is the flip side of the coin of their perpetual trade deficit. And again, it proves that Trump's claim that the deficit is a subsidy is absolutely false. The rest of the world is giving America more money so that they can basically consume more than that they produce. So it's clearly America that's on the bailout end of the deal here. Okay, so obviously if I'm Canada, I'm making this case to my American counterparts right now.

We've talked on the show quite a bit about how bad these tariffs would be for us. Like, Doug Ford is saying 500,000 jobs in Ontario alone. We're talking recession level destruction. What would putting blanket tariffs on us do to America? It would hurt them as much in aggregate as it hurts us. Absolutely. For various reasons. Number one, they got to know that there's going to be retaliation. We're not just going to sit here and let them do the 25% tariff and the government's already made that clear. So a trade war is going to disrupt America's sales in Canada as much as it disrupts Canada's sales in America.

And Canada is America's biggest market for exports of goods and services, about half a trillion dollars a year, far more than they sell in China or Mexico or Europe or anywhere else. That's going to hurt. That's like shooting yourself in one foot. But here's where they shoot themselves in the other foot at the same time. Most of what we sell to America is not finished products that show up on the shelf at Costco for consumers to choose from.

Then Mr. Trump can say, nope, buy American products and we'll put a tariff on to help you do that. Instead, nope, buy American products and we'll put a tariff on to help you do that. Instead, we sell them unfinished products. So this includes all of the inputs and materials and raw materials and energy and parts that go into US businesses, including our energy. We talked a lot about the energy, but the same applies for other minerals, critical minerals, forestry, agricultural commodities, auto parts, industrial materials, et cetera, et cetera. So if those all become 25% more expensive, American businesses are going to have a heck of a shock, a cost shock, and they're going to pass that on. It's going to be inflationary in the US and it's going to disrupt their supply.

If the flow of auto parts, for example, was disrupted, virtually every auto assembly plant in America would experience enormous disruption and probably multiple shutdowns because they need our stuff to do their business. This is how imposing a tariff on Canada, where we've had an integrated continental economy for decades is very, very different than imposing a tariff on, say, finished products from China. Even that would hurt American companies, but more of the Chinese imports are finished products that might compete directly with American products. Not so in Canada's case. In Canada's case, American businesses would be hurt. So they're shooting themselves in both feet. They're going to hurt their own export sales, and they're going to hurt the competitiveness

of their own business. And just what about the argument that it would be a problem at first, for sure, but that then American businesses would adapt and figure out how to do all that stuff at home. Therefore, I suppose, and this is Trump's argument, like bringing more American jobs back to America. Well, first of all, there's a lot of American jobs that depend on their exports to Canada. So it's not at all clear that this is a net winner for jobs, even if you allow for the time for that adjustment. And that adjustment would take years. And in the meantime, you'd have a lot of unemployment

in the US and a lot of inflation in the US. So, you know, eventually they will adapt, no doubt about it. And we would adapt. We would find other places to sell our stuff and we would reorient our own industries towards serving Canadian consumers, rather than assuming that we can trade our way to prosperity, which is kind of what we've been assuming for the last three decades.

But the end point will in a way be less beneficial than where you have a mutually beneficial trade flow. And I think for both Canada and the US, both sides benefit from the trade. I would argue the Americans at least as much as we do. It isn't a bailout in any way, shape or form. But if in fact we have to shift away from that on a permanent basis, both sides are going to be worse off. Jim, just before we go, if we do get into trade trade war here and, you know, we heard the Prime Minister and

other politicians talk about dollar for dollar matching tariffs, what might our governments at various levels either be forced to do or choose to do to react to, like, the effects of all of this at home? Well, there's no doubt that an all out trade war with the Americans would be a national economic emergency for us. The industries that we depend on for exports are so important to our economy,

and then they would have ripple effects through every other industry in the country. So governments are gonna need to be ready to respond to an emergency in some ways, almost like we did in the pandemic. First of all, industries are going to have to be supported so they can stay in business, despite this shock, and start to reorient and retool to serve other export markets or Canadian consumers. Secondly, workers are going to need a huge amount of support. I think it's going to

require something almost like the CERB and other emergency payments that we had during the pandemic to ensure that people don't lose their homes, to ensure that purchasing power in the economy is resilient so that we don't have an all-out depression, and to help people while they have to adjust potentially to new jobs. And then third, I think there'll be just a fundamental rethink that's required. I think we're going to need to do this even if Trump doesn't go with the full tariffs. Just the experience of him threatening the tariffs to, you know, exert leverage and extract concessions is such a challenge to our sovereignty, first of all, but also the value proposition that we've given the world. We've said come and invest in Canada and among other advantages, you've got terror-free access to the US market. Nobody believes that anymore because they realize the president can just tear the treaty up as he's just done. And that's going to hurt us

for years, even if Trump doesn't go ahead with the 25% tariff. So we're going to need to, in a way, a kind of another national plan, sort of like we had in our early days as a country. How are we going to build an economy and build industries that obviously relate to the United States? We can't ignore it, but that somehow have an independent viability. And that is going to mean putting more emphasis on things that Canadians need, like affordable housing or good infrastructure or clean energy. Those are all things that we could invest and create jobs in that don't depend on exports to the U.S. And I think in the future we're going to need a lot more of that.

Okay, Jim, thank you so much for this. As always, really appreciate it. My pleasure, Jamie. Thanks for having me. All right. That's all for today. I'm JB Poisson. Thanks so much for listening. Talk to you soon.