As we have noted from the beginning, the overwhelming majority of the Canadian people genuinely have no idea what the final goal is for President Trump; this includes Prime Minister Mark Carney. A few Canadians can see the big picture, but only a very few.

Today, President Trump announces that all trade negotiations with Canada are halted, effective immediately, because Mark Carney and his team are trying to target the USA with a Digital Services Tax. When you know the end-game for Trump, you can clearly see how this positioning from Canada once again plays directly into his hands.

PRESIDENT TRUMP – “We have just been informed that Canada, a very difficult Country to TRADE with, including the fact that they have charged our Farmers as much as 400% Tariffs, for years, on Dairy Products, has just announced that they are putting a Digital Services Tax on our American Technology Companies, which is a direct and blatant attack on our Country. They are obviously copying the European Union, which has done the same thing, and is currently under discussion with us, also.

Based on this egregious Tax, we are hereby terminating ALL discussions on Trade with Canada, effective immediately. We will let Canada know the Tariff that they will be paying to do business with the United States of America within the next seven day period. Thank you for your attention to this matter!

President Trump has deferred all North American trade negotiations with Canada and Mexico until later in the year, after the priority trade deals with other large trade partners are completed.  The USMCA trade pact is due for review and renegotiation this year [BACK STORY]. We should expect an entirely different trade pact as an outcome, quite possibly the ending of the trilateral nature of the current agreement.

Meanwhile, Prime Minister Mark Carney has been traveling Europe, trying to align trade allies and partners for what will likely be a major confrontation that he simply cannot win.

♦ BACKGROUND – Following the 2024 presidential election, Canadian Prime Minister Justin Trudeau traveled to Mar-a-Lago and said if President Trump was to make the Canadian government face reciprocal tariffs, open the USMCA trade agreements to force reciprocity, and/or balance economic relations on non-tariff issues, then Canada would collapse upon itself economically and cease to exist.  In essence, in addition to the NATO defense shortfall, Canada cannot survive as a free and independent north American nation, without receiving all the one-way benefits from the U.S. economy.

To wit, President Trump then said, if Canada cannot survive in a balanced rules environment, including putting together their own military and defenses and meeting their NATO obligations, then Canada should become the 51st U.S state.  It was following this meeting that President Trump started emphasizing this point and shocking everyone in the process.  However, in the emotional reaction to Trump’s statements, no-one looked at the core issues outlined by Trudeau that framed President Trump’s opinion.

Representing Canada, Justin Trudeau was not expressing an unwillingness to comply with fairness and reciprocity in trade with the USA, what Trudeau was expressing was an inability to comply.  Quite simply, after decades of shifting priorities, Canada no longer has the internal economic capability to comply with a fair-trade agreement (FTA).  Trudeau was not lying, and President Trump understood the argument; hence his 51st state remarks.

This is where it becomes important to understand the core reason why Trump, Ross and Lighthizer (2017) did not structurally want to replace the NAFTA agreement with another trilateral trade deal. Mexico and Canada are completely different as it pertains to trade with the USA. President Trump would rather have two separate bilateral agreements; one for Mexico and one for Canada.

♦ Firstly, Canada is a NATO partner, Mexico is not.  As President Trump affirmed to Justin Trudeau during the meeting, it would be unfair of President Trump to discuss NATO funding with the European Union, while Canada is one of the worst offenders.  Trump is leveraging favorable trade terms and tariff relief with the EU member states, as a carrot to get them into compliance with the 2.0 to 2.5% spending requirement for their military.

If the NATO member states contribute more to their own defense, the U.S. can pull back spending and save Americans money.  However, Canada is currently 26th in NATO funding, spending only 1.37% of their GDP on defense (link).

Canada would have to spend at least another $15 billion/yr on their defense programs in order to reach 2.0%.  Justin Trudeau told President Trump that was an impossible goal given the nature of the Canadian political system, and the current size of their economy ($2.25 trillion).

♦ Secondly, over the last 40 years Canada has deindustrialized their economy, Mexico has not.  As the progressive political ideology of their politicians took control of Canada policy, the ‘climate change’ agenda and ‘green’ economy became their focus.  The dirty industrialized systems were not compliant with the goals of the Canadian policy makers.

The dirty mining sector (coal, coking coal, ore) no longer exists at scale to support self-sufficient manufacturing.  The dirty oil refineries do not exist to refine the crude oil they extract.  Large industrial heavy industry no longer exists at a scale needed to be self-sufficient.  Instead, Canada purchases forged and rolled steel component parts from overseas (mostly China).  Making the issue more challenging, Canada doesn’t even have enough people skilled to do the dirty jobs within the heavy manufacturing; they would need a national apprenticeship program.  Again, all points raised by Trudeau to explain why bilateral trade compliance was impossible.

♦ Thirdly, the trade between Canada/U. S and Mexico/U. S is entirely different.  The main imports from Canada are energy, lumber and raw materials. The main imports from Mexico are agriculture, cars and finished industrial goods.  Mexico refines its own oil; Canada ships their oil to the USA for refining.  There are obviously some similar products from Mexico and Canada, but for the most part there is a big difference.

♦ Forth, USA banks are allowed to operate in Mexico, but USA banks are not allowed to operate in Canada.  USA media organizations are allowed to broadcast in Mexico, but USA media organizations are regulated and not permitted to broadcast in Canada.  The Canadian government has strong regulations and restrictions on information and Intellectual Property.

All of these points of difference highlight why a trilateral trade agreement like NAFTA and the USMCA just don’t work out for the USA.

Additionally, if President Trump levies a tariff on Chinese imports, it hits Canada much harder than Mexico because Canada has deindustrialized and now imports from China to assemble into finished goods destined to the USA.  In a very direct way Canada is a passthrough for Chinese products.  Canada is now more of an assembly economy, not a dirty job manufacturing economy.

When Trudeau outlines the inability of Canada to agree to trade terms, simply because his country no longer has the capability of adhering to those trade terms, a frustrated President Trump says, “then become a state.”

There is no option to remain taking advantage of the USA on this level, and things are only getting worse.  Thus, the point of irreconcilable conflict is identified.

Because the Canadian government became so dependent on their role as an assembly economy, they enmeshed with China in a way that made them dependent.  The political issues of Chinese influence within Canada are a direct result of this dynamic. In fact, China was the big winner from the outcome of the recent election because all of their investments into Canada are grounded on retaining Liberal government dependency.

If Trump targets China with punitive tariffs, the Canadian economy will be collaterally damaged.  Canada will end up paying a tariff rate because they use cheap Chinese component parts in their finished goods.  Canada has structurally designed their economy to do this over multiple years.

Understanding the unique nature of the Canadian economic conundrum, the only way to address the issue is to break out the USMCA into two separate bilateral trade agreements.  One set of trade terms for Mexico that leverages border security, and one set of trade terms for Canada that leverages NATO security and border security.  The only substantive similarity between them will be in the auto and agriculture sector.

If you think the multinational corporations, political leftists and UniParty Republicans in the USA are strongly opposing Trump now, just wait until later this year when the Trump administration proposes the elimination of the trilateral North American trade agreement, USMCA.

According to the World Bank, the USA economy is $27.3 trillion.  Canada is $2.1 trillion.

Do the math!

[…] The expectation, according to two people close to the White House, is that negotiations to permanently remove the threat of painful 25 percent tariffs on Canada — which Trump mostly rolled back earlier this month — and other sector-specific tariffs are likely to be folded into the upcoming review of the U.S.-Mexico-Canada Agreement. That review is due in 2026, but the Trump administration wants to accelerate to this calendar year.

“It makes sense to separate out Canada and Mexico from the rest because they are going to want to redo the USMCA,” said one of the people close to the White House, who were granted anonymity to discuss ongoing deliberations. “They’re going to have separate tariffs that focus specifically on Mexico and Canada, and they’re going to take some actions to squeeze them a little bit.” [LINK]

Posted in Auto Sector, Canada, Donald Trump, Economy, Mexico, President Trump, Trade Deal, Uncategorized, USMCA
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