S. A. Shelley: Over the last couple of months there has been a lot of discussion about tariffs. The Trump administration is keen to apply tariffs on Mexico and Canada, and a host of other nations (except maybe China?). In terms of the percentage of GDP that international trade contributes to their economies, it is obvious that the US can sustain a trade war quite well compared to other nations or regions (Fig. 1).
There is of course the counter argument to protectionism that not every nation can supply itself with all that its economies need. For instance, Canada argues that it supplies a surplus of energy (oil and electricity) to the US and that it also supplies 43 of the 50 minerals designated as critical by the US federal government. Be careful Canada. Oil production in the US can be ramped up quickly to displace a lot of that oil from Alberta, and recently decommissioned coal power plants can also be brought back online to displace electricity coming from Quebec (Newfoundland) or Ontario. Canada cannot, in any real time, plant citrus groves and fruit farms to feed its population (Fig. 2) nor build pipelines fast enough to get oil or LNG to deepwater.
When it comes to Canada, discussion has also focused on how the automotive industry in particular is so highly intertwined with the US that tariffs on Canadian components will raise car prices for Americans and lead to layoffs. Numerous entities note that some critical auto parts cross the border seven or more times before the car is finally assembled. From an energy usage viewpoint, this is disappointing. Every time that a part, component or sub-assembly is moved across a border, it’s carried by a truck that burns a lot of diesel.
The Canada US Auto Pact agreed in 1965 came about from Canadian concerns about their car industry being inefficient. After a few years of study, it was decided in Canada in 1962 to slap a tariff of 25% onto transmissions imported from the US, while simultaneously initiating conversations with the US about loosening trade barriers for the automobile industry. The Canadians at the time put the stick before the carrot. Canada-US Auto Pact: The Canadian Encyclopedia ) Now, Canadians are protesting vehemently, to anyone who will listen, about how unfair US tariffs of 25% are, while forgetting that Canada initiated such tactics over 60 years ago.
It is also less universally understood that the Canada US Auto Pact was skewed towards Canada having a greater share of labour while the US would have a greater share of engineering and technology (capital). There were some production efficiency improvements in Canada following the Auto Pact, but Canadians never achieved parity or near parity to US production efficiency. If one compares across other industries, there is some inherent, consistent production inefficiency to all things Canadian. This has always been the case and continues to be the case in Canada. Canadian politicians speak often about the need for STEM and investment in industry (hardware and software) but then turn around and enact policies that favour social engineering. Innovating and improving productivity has never been a Canadian thing.
“In effect, (The) U.S. generates 1.5 times higher gross fixed capital formation per worker. The gap is even wider in productivity enhancing spaces like intellectual property (IP) and machinery and equipment (M&E)” (canada-prosperity-report-2025.pdf, from Boston consulting Group, February 2025).
If one looks at the Canadian economy more broadly, real estate comprises about 40% of the Canadian economy. After that it’s services, then lower down manufacturing, agriculture and resources. One can’t export real estate so tariffs can’t affect that. What little manufacturing remains went from about 16% of the Canadian GDP to only 9% in just two decades. Canadian manufactured goods are not a significant input into the US economy and hardly noticed globally. I will posit that the only thing keeping the Canadian economy from falling to third world status is the high volume of oil exported to the US. Canada still is a petro-state and without that trade the federal coffers would be empty.
Efforts to bring Canadian oil and gas exports to the global markets were unilaterally and ideologically shot down by the Federal Liberal government. Contrary to Justin Trudeau’s assertations, there has always been a business case for exporting LNG to Europe, Japan and elsewhere. There has always been a business case for exporting agricultural goods through Churchill, Manitoba (note 1), but after the Wheat Board dissolution by the previous Conservative Federal government, the current Federal Liberals shut down the port in 2016.
One should not be surprised when such things happen in Canada because successive Federal Governments comprise ideologues with an inculcated inability to think independently, creatively and over a long-time horizon. Politicians in Canada appear to be more concerned about padding their pensions and pay, than helping Canadians survive, let alone thrive. The political class has a limited ability to observe and understand markets, let alone technologies and the need for innovation. Canada must endure harsh climates and difficult geographies but chooses to suffer rashness and incompetence in power (note 2).
Instead of racing to apply counter tariffs and such, Canada can either take the long position by investing in industry, including the means to get stuff to global markets, or take the short position and acquiesce to US whims while trying to understand what the US administration really wants from Canada. Critical minerals? Check. Energy integration? Check. More defence capability? Absolutely. But perhaps overlooked is a pivot of Canada away from China. (see Canada spies found China ‘clandestinely and deceptively’ interfered in last two elections ; Liberal leadership: Freeland target of foreign interference) Unfortunately, the governing Federal Liberal party has had very tight relationships with China for quite some time. The 51st State (note 3)? It is surprising that Canada hasn’t yet become an overseas province of China.
Vive l’Alberta libre!
1. Yes, Canada had a functioning Arctic port through which large amounts of agricultural goods were exported.
2. I struggled to find an appropriate term to describe the staggering incompetence of politicians at all levels and across the political spectrum. I think that they deserve a new anthropological sub-categorization: Homokleptus Narciss Unintelligensis. I am willing to wager that this applies globally.
3. Canadians also overlook that this 51st state rhetoric may have come about because of a blunder by the Prince of Privilege. “The President’s meeting with Trudeau, and Trudeau says if you even out our trade relationship, then we will cease to exist as a country. At which point the President responded very logically, and that is, well, if you can’t exist without cheating in trade, then you should become a state,” said Rubio ( Rubio explains Trumps stance on Canada becoming 51st state ). I’m not sure of the veracity of this because I doubt that Trudeau could utter any coherent thought about trade, but maybe he got lucky that night.
4. Our thanks to Mr. C and Mr. R of Canada for providing editorial support.
