Photo by Hudson Thomas on Unsplash
It is hard to understand Trump actions on US allies in the current confusion generated by Trump and his people. I began with an effort to assess the state of US-Canada-Mexico ‘renegotiation’. I must admit I found it hard to get a sense of progress, or not, in this review year for USMCA. As Christopher Sands describes at Brookings:
“It is unclear whether the outcome of the first-ever joint review of the United States–Mexico–Canada Agreement (USMCA) will produce a renewal, revision, or termination of the agreement that was one of the most significant achievements of the first Trump administration.”
“What is known is that the joint review leads to a decision that must be made by each of the USMCA member governments:
Whether to renew the USMCA for 16 more years (with another joint review after six years);
Whether to withdraw from the USMCA (following a minimum of six months’ notice to the other members); or
Whether to continue the USMCA without renewing it (in which case the agreement remains in force for 10 more years and expires in 2036).”
Now Christopher Sands is a visiting fellow in the Global Economy and Development program at the Brookings Institution, where he leads the USMCA initiative. Sands goes on to say the following about the state of negotiations:
“Each country must make its decision, but if one country chooses Option 2 or 3, this will affect the others. If one country chooses Option 3, continuation without renewal, then joint reviews like the current one will be conducted every year until all three agree to renew the agreement or it expires in 2036. …”
“The consistent thread of optimism running through each contribution is striking. It is not optimism for the USMCA alone, but for the North American economy as a dynamic, competitive, and innovative regional production platform that draws synergies and fosters specialization through linkages connecting the U.S., Mexican, and Canadian markets.”
Notwithstanding this expression of optimism by Sands, the bilateral and trilateral politics in North America remains rather fraught. Such is hardly a surprise given the folks in the Trump administration not to mention Trump himself. For that piece of the current story I turned to Tonda MacCharles, the head of the Ottawa Bureau for the Toronto Star, one of Canada’s best known papers. There she described Prime Minister Carney’s strong reaction to threats by Trump and members of his administration:
“Prime Minister Mark Carney blasted the United States for ongoing complaints about “trade irritants” like Canadian dairy quotas and provincial bans on U.S. alcohol, saying it is the U.S. that breached the free trade pact.”
““Look, you know what’s an irritant,” said Carney at a news conference in Ottawa. “Fifty per cent tariff on steel, 50 per cent tariff on aluminum, 25 per cent tariff on automobiles, all the tariffs on forest products. Those are more than irritants. Those are violations of our trade deal.””
“Carney suggested provinces are justified in their own retaliatory measures, saying they are a “client” of American producers and can decide for themselves.”
“By imposing sectoral tariffs on autos, metals and lumber in violation of the Canada-U.S.-Mexico Agreement, the current U.S. government has changed long-standing American trade policy, and that’s “their right,” said Carney. He said his government remains prepared to hash out all disputes at a negotiating table.”
In the face of pointed Trump administration actions and further threats it is not surprising that the Prime Minister would then refer back to his ‘variable geometry’ policy declaration:
“Carney said the back-and-forth demands of the U.S. are to be expected. “That’s a negotiation,” but the prime minister reminded that “there are two parties in a negotiation. We’re not sitting here taking notes, OK, and taking instruction from the United States.””
““I will just underscore we understand that the, and this is the point I’ve been making since day one, is that this long period of integration, deeper integration between Canada, United States is over, that nostalgia isn’t a strategy, that hope isn’t a strategy, we’re not going to go back to exactly the way things were. The U.S. has changed.””
““Look, what do you think rupture means? Rupture means that things are not normal. Nostalgia is not a strategy. Things have changed. Things have changed fundamentally. We get that.””
“The prime minister said that is why he is focused on a longer-term plan to diversify trade relations and to build a stronger economy within Canada.”
John Stackhouse, a well known former journalist in Canada and currently senior vice-president in the Office of the CEO at Royal Bank of Canada described the state of US-Canada relations, and the trade negotiation this way at Brookings:
“Trump has repeatedly threatened to upend the agreement, not to sever North American trade but to increase U.S. leverage.He will try and bring Canada as close to U.S. terms as possible, including greater access to Canada’s dairy market, tougher rules of origin for conducting trade in strategic sectors such as defense, mining, advanced manufacturing, steel, and aluminum, and closer alignment of Canadian digital regulation affecting U.S. technology platforms. Canada will seek to protect market access and reduce dependency through its own industrial strategy.”
“As a result, there are at least three major restructurings underway:
1. Expanding ports and export infrastructure to reach markets beyond the United States.
2. Building domestic defense, digital, and data capacity with a “Buy Canadian” approach to procurement and a willingness to increase collaboration with other European and Asian partners.
3. Rebuilding domestic industrial capacity while reorienting manufacturing toward higher-value, globally competitive activity.
These new directions reflect that Canada’s government is determined to set a resilient course for the economy, which is not dependent on a Truth Social post.”“For two generations, free trade has been Canada’s defining economic condition. It has delivered prosperity, but also deep dependence on a single market—now under the threat of an administration that seeks hemispheric dominance, and even territorial expansion.”
Thus one understands the context for the Craney government efforts to diversify Canadian trade and investment. The Carney government course, or course adjustment, is not an easy path by any measure, especially given the current economically integrated state and the pressures from the Trump administration. US pressure will be strong and threatening but it appears that a long overdue policy correction is indeed underway.
One evident recent example is the “Made in Europe” scheme. As described recently in the FT by Sebastien Ash, Ian Johnston and Ilya Gridneff:
“The EU’s “Made in Europe” bill, formally called the Industrial Accelerator Act (IAA), is designed to boost the bloc’s manufacturing output, which fell from 17.4 per cent of EU GDP in 2000 to 14.3 per cent in 2024.”
“EU officials have told the FT they are open to deals with third countries, which could be made after the IAA has been adopted, potentially by the end of the year.”
With respect to Canada:
“Canada will seek talks with Brussels to gain access to the EU’s “Made in Europe” manufacturing scheme, its industry minister has said, as Ottawa looks to boost trade beyond the US. Brussels last month unveiled plans to shield strategic sectors such as clean energy technology and heavy industry from unfair competition from third countries, especially China, by limiting access to subsidies and public contracts in those areas to EU-based businesses.”
“However, manufacturers from countries with which Brussels has trade agreements could also be included if EU companies are offered reciprocal access to public subsidies and contracts in those markets.”
“Canada’s industry minister Mélanie Joly told the FT that Ottawa wanted to make sure that industrial policy in the EU and Canada was “aligned”.”
“Asked whether that meant she thought Canada should be included in the “Made in Europe” scheme, Joly said Ottawa’s goal was “to engage the EU to have a reciprocal approach”.”
“Any deal between Ottawa and Brussels over their industrial sectors would support Canadian Prime Minister Mark Carney’s appeal for “middle powers” to work together to form an economic counterweight to the US and China.”
It would seem that the Carney government’s “Middle Power variable geometry policy” is indeed underway. There are no givens in this new Canadian policy direction. But for sure, we will watch very closely. A lot is riding on this turn in Canadian trade policy.