Friend or Foe? An Economic War With the U.S. Should Inspire Greater Canadian Autonomy
30 January 2025

After a grandiose first week (back) in office, President Trump 2.0 has turned international politics upside down, again, leaving governments and analysts alike scratching their heads. Among the flurry of threats and accusations, some of his most foreboding has been directed towards his neighbours to the North.
Even before his inauguration, President Trump has repeated false claims against the United States’ kindred ally, and warned of a tariff hike of 25% on all Canadian imports as early as February 1st. The reasoning behind his Northern fixation remains ambiguous, given that he has harped on just about everything: Canada playing a major role in the U.S. fentanyl crisis (it doesn’t – seizures of the deadly drug along the shared border amount to 0.2% of the volume compared to the U.S.-Mexico border); toting the U.S. healthcare system’s over Canada’s (Canada’s is free); and airing his grievances at the World Economic Forum, where he complained that Canada is “very nasty” on trade (Canadians, nasty? Fake news).
A quick recap, in case he’s forgotten; the overarching Canada-U.S.-Mexico Agreement (CUSMA/USMCA) was negotiated by his own administration, in June 2020. Even so, Trump doubled down by criticising the bilateral trade relationship by, surprise, surprise, making another false claim that the U.S. runs a $200 billion USD deficit with Canada. According to the Office of the U.S. Trade Representative, the U.S. deficit with Canada was only $53.5 billion in 2022, and has been declining since. Furthermore, it is worth noting that this deficit is largely caused by the U.S. importing a significant share of low-cost Canadian crude oil, which helps keep U.S. gas prices lower.
Should he move forward with the tariffs, Canadian officials have already signalled that they are prepared to reciprocate dollar-for-dollar. This dispute could therefore get very ugly, and may reshape the U.S.-Canada relationship in the years to come. As it stands, from security, to the economy, very few countries are so intertwined and interdependent. To offer an example, parts for North American vehicle assembly can cross the shared borders as many as seven or eight times before the finished product is completed.
In the event of a severe trade war with the U.S., Ontario’s political leadership has warned that as many as 500,000 jobs in the province alone could be at risk. Given the weight class disadvantage, Canada would be faced with few options: renegotiate CUSMA/USMCA early, which could be Trump’s intended end game, or risk companies revaluating the costs of running their factories there in light of a possible tariff hike. There is another economic weapon in Canada’s arsenal, however, its nuclear option – energy.
The United States is Canada’s largest consumer of both its oil and natural gas. In fact, continental energy security is one of the very foundations on which the U.S.-Canada relationship was formed. Canada should therefore be prepared to enact export tariffs on its energy or even threaten to limit supply.
This too would not be without risks. On the contrary, it could in fact lead to shortages of oil and refined fuels in other regions of Canada. This is because a significant portion of Canada’s oil pipeline from where it originates in Alberta, travels through the U.S. on its way to eastern Canada, meaning the U.S. has the ability to obstruct Canada from supplying itself. This would of course violate a longstanding treaty, but remember who we’re talking about. After all, tariffs in general are a violation of CUSMA/USMCA.
Should President Trump decide to pursue this path, turning a trade war into an oil war by switching off the taps from Western to Eastern Canada, the hardship would be especially felt in the economic hub of Ontario. These disruptions to Canada’s supply could be overcome eventually through a number of means, but it would be a challenging road ahead and shortages would be a real possibility.
Moving forward, Canada should look to expand the supply capacity of its existing Trans Mountain Expansion (TMX) pipeline to the West Coast, thereby increasing its supply capacity to Asian markets. It should also revive the intra-Canadian pipeline that would enable Canadian oil and fuels to travel east without ever leaving the country. Eventually, this would also open the door for completing a new pipeline to the East Coast, and on to European markets.
Such scenario planning would be unfathomable a few years ago, given the intimate, historic partnership between Canada and the United States. But then again, it is also profound for a sitting U.S. president to attempt to extort or threaten the annexation of its northern neighbour. Given the current political uncertainty, diversification of Canada’s energy exports, and trade relationships, a move away from interdependence with the U.S. seems to be the only guarantee for Canada to retain its economic security. This would also open new opportunities for job creation, new ventures, and markets.
In the weeks and months to come, any potential trade war launched by the U.S. against Canada (and Mexico), should be watched closely by Europe, and all Western nations, really. President Trump’s affinity with the “America First” mantra, after all, means just that. How far he’s willing to extort America’s closest allies to achieve it, will be the question.
For Canada, and Mexico, these threats could be intended to force premature negotiations of CUSMA/USMCA, to avoid possible economic bumps in the leadup to the U.S. midterms, when the agreement is scheduled for review. It could be an attempt by President Trump to negotiate better access to the geostrategic Arctic region via Canada, and coincide with his fixation with Greenland. Or, it could be a move to encourage North American businesses to relocate to the United States.
The bottom line? For the next four years at the very least, the rules-based order, free trade, and norms will not be found in the U.S. playbook. Any leverage will become key in future negotiations, whether we’re speaking of this dispute, or any other involving the U.S. under President Trump.
In the event of an all-out economic war with the U.S., Canada will persevere so long as it invests in its future as a means to ensure its economic security. It should be prepared to use all tools available to its advantage, lessen interdependence with the U.S., and strive for greater autonomy. Indeed, there may be severe economic hardships ahead for Canadians depending on how far this dispute gets. Fortunately, for Canada, no two issues unite the nation more than hockey, and threats to its national sovereignty.
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