Carney did well in Washington, but he must realize Canada’s only choice is compromise

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

There’s a dramatic tragedy playing out on the world stage. With the return of U.S. President Donald Trump, the international order is decaying, particularly in trade and security arrangements. In this new world, Canada’s path forward is starting to take shape, with Prime Minister Mark Carney’s visit to Washington on Tuesday.

It was a trip with low expectations, given we’re at the absolute nadir of bilateral relations. Just days before, Canadians voted in an election defined by nationalism, and Mr. Trump renewed talk of annexation.

But Tuesday’s meeting was a good start. Leading up to the date, Mr. Trump had called Mr. Carney a “very nice gentleman” and talked about making a “deal.” Experts had predicted that Mr. Carney would put forth the outlines of a new agreement, laying the groundwork for more talks.

During Tuesday’s meeting, Mr. Trump repeated old talking points, but he also said he wants no concession from Canada other than “friendship.” The leaders set the stage for further talks, with Mr. Carney saying he was prepared for a “step-change in our investment in Canadian security and our partnership.”

We must seize the moment to find a new bargain with the U.S. on security and economics. And we must make peace with the uncomfortable prospect of finding common cause with our southern neighbour. The harsh truth is that we have no choice but to compromise.

Whether we like it or not, the U.S. is destined to be Canada’s closest economic and security partner. Canada will fare better when it understands how the U.S. is changing its terms of engagement. Rather than entering into hysterics, deflecting or dreaming up retaliation attacks, this country should focus instead on increasing its value proposition to the U.S.

We need to zoom out and recognize how geopolitical ruptures can be set in motion. This often comes down to shifts involving both security and economic considerations.

As the pre-eminent superpower, the U.S. has anchored the global system that attempts to govern these two domains since the Second World War. And the world has been made better for it.

However, providing these global public goods, in the form of an open market policy and extensive security agreements and enforcement, involves costs as well as benefits. Material conditions have shifted in a manner that the U.S. no longer accepts the terms of this bargain. Through fits and starts, the U.S. is altering the term sheet for their participation in these collective action problems.

One constant will remain in this new era of geopolitics: the U.S. will continue to be the central foreign-policy question in Canada’s economic and security affairs. For Canada to get the best deal in its relationship with the U.S., it needs to clearly understand and accept the motivations behind Mr. Trump‘s actions – we can’t wish them away.

Only with a clear analysis of what the U.S. wants can Canada protect its sovereignty, and benefit from trade and security arrangements with its southern neighbour.

It’s not surprising Canadians have a difficult time comprehending Mr. Trump‘s actions. He speaks with many voices and deals in expletive language akin to pro-wrestling rather than explicit articulation of his policy intentions. While many point to Mr. Trump‘s own actions as evidence of irrationality, beneath the contradictions and chaos lurks a rational actor – albeit bounded by complexity.

Commentators note that tariffs will lead to inflation and hurt affordability, surely something any politician would seek to avoid. But Mr. Trump‘s actions are based on a different set of assumptions than those Canadians are judging him by. We don’t have to agree, but we should consider them if we want to understand and predict his behaviour.

While Mr. Trump‘s “Liberation Day” tariff scheme appears to be all over the map, logic falls into place when they are considered as three separate categories: those that aim to reshore production; those that are targeting revenue generation; and those that are designed for bargaining purposes, with China being a special case.

Production-oriented tariffs will target specific industries or sectors. They will be high enough to alter consumer purchasing and production investment decisions. They will be durable and unlikely subject to negotiation. The goal here is to bring back manufacturing to the U.S. in key industrial sectors, such as automotives, semiconductors, pharmaceuticals and likely more to come.

Here, Mr. Trump‘s economic agenda partly overlaps with security. As wars in Ukraine and the Middle East have made clear, military supply chains are a deciding factor in conflict. The U.S. seeks to ensure that it has domestic capacity to fuel a war machine, should it be needed. However, the deindustrialization driven by its prior open economic policy did damage to the industrial base needed for military hardware – hence, the tariffs targeting steel and aluminum.

Revenue-generation tariffs are the lower, broad-based tariffs. At 10 per cent, these will unlikely be enough to influence major investment decisions. In most cases, trade will continue with some mix of exporters and importers absorbing the costs. Duties collected from these tariffs will fill government coffers and support Mr. Trump‘s tax cuts and other spending plans.

The reciprocal tariffs announced at higher-than-10-per-cent levels – targeting more than 50 countries – will primarily serve as bargaining chips for the U.S. to extract market access concessions from these countries, particularly the European Union and major economies in Asia.

Some countries have already engaged the Trump administration to demonstrate a willingness to negotiate. Combined with the considerable supply chain disruptions such tariffs would inevitably lead to and market volatility, Mr. Trump has offered a 90-day pause. The world saw this whip-saw approach with Canada’s experience over the last two months and now knows that while he may adjust scope, his threats need to be taken seriously – even when reprieves are granted.

China is a special case. The U.S.-China trade war did not start with Mr. Trump‘s “Liberation Day” tariffs. It’s been waging in a more limited sense since March, 2018. The U.S. has been attempting to rectify uneven terms of trade with China under both Trump and Biden administrations.

As ground-zero in the U.S. trade policy blow-up, a reprieve or deal will be much harder to make. With two superpowers on a collision course, neither side will be willing to make concessions – with collateral damage threatening the global economy.

We’re living through the early days of the global re-ordering, which will inevitably include more volatility. The challenge for Canada is that we’ve grown accustomed to the withering status quo. The terms of the old bargain benefitted us.

With the U.S. underwriting our security, we could pursue generous social-welfare programs – programs that also helped define us as distinct from the Americans. With a large open U.S. market, we didn’t have to work too hard in the challenging and competitive world of international trade, nor did we have to worry about cross-country infrastructure projects or a seamless internal market.

For good reason, there will be hesitancy amongst Canadians about further co-operation with the U.S. in some key areas. While we are a sovereign country, tight integration and the limited options immediately available to Canada have made us a protectorate of sorts.

As the Trudeau years demonstrated, Canada has had a hard time fully pursuing an independent foreign and security policy. Fortunately, we still share many interests with the U.S., so working together to identify some key areas of mutual concern shouldn’t be a tough hill to climb.

If Canada wants to benefit from preferential market access and the U.S. security blanket, then finding a new economic and security relationship that works for both countries boils down to Canada’s willingness to take on a greater share of the load.

In essence, this is about bargaining over the distribution of costs and benefits. Canada needs to assess what it’s willing to pay vis-a-vis what elements of the old relationship it determines it can live without.