Business Brief: What does Trump want from Canada?

Good morning. Welcome back from the long weekend, did you have a chance to get out and about? We’re checking in with where things stand for Canada after the United States imposed a new, higher tariff. Some words on the matter from columnist Tony Keller are in focus today, plus an idea to innovate airport security screening. On y va:

Up firstIn the news

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Dairy: Unpacking U.S., New Zealand and Australia’s claims that Canada is dumping dairy proteins into international markets

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What else you missedOpen this photo in gallery:

U.S. President Donald Trump meets with Prime Minister Mark Carney in the Oval Office at the White House on May 6.Leah Millis/Reuters

In focusCanada’s ace in the hole has been USMCA. That could change.

The following is an excerpt from Tony Keller’s most recent column: What does Donald Trump want from Canada? We are about to find out

President Donald Trump has already delivered the biggest change to the global economic order since the fall of the Berlin Wall, and there is more to come. That’s the context in which Canada is trying to negotiate with Washington.

Prime Minister Mark Carney appears to be attempting to preserve as much as possible of the free trade relationship with the U.S., while laying the groundwork for a future in which Canada has no choice but to trade less with the U.S.

The Trump administration’s goal is to force the rest of the world to sell less to the U.S., which it believes will lead to far more domestic U.S. production. In accepting a 15-per-cent U.S. tariff, Japan, South Korea and the EU all effectively agreed to this. Britain did likewise, accepting a 10-per-cent tariff.

What ultimate level of import duties Trump hopes to impose on Canada, covering what basket of goods, remains unclear.

However, Carney has signalled that any deal with the U.S. could include a baseline tariff, as Japan, South Korea and the EU agreed to. He also implied that Canada might have to offer commitments to buy U.S. goods or make investments in the U.S., as those other trading partners did, though the terms of their promises are vague and possibly meaningless.

Canada’s ace in the hole has been the United States-Mexico-Canada agreement. The 35-per-cent tariff that Trump slapped on Canada on Thursday night – up from the 25-per-cent rate imposed earlier this year – only applies to goods that are not USMCA-compliant. The Bank of Canada last week estimated that 100 per cent of Canadian energy exports, and 95 per cent of everything else, is covered by the USMCA. The whopping 35-per-cent tariff only applies to less than 5 per cent of our exports.

However, several Canadian industries are subject to sectoral tariffs, including a 50-per-cent levy on steel and aluminum, a 25-per-cent tariff on cars, and new duties on lumber. These hit hard because Canada is a major exporter of these goods, and our auto industry is fully integrated with U.S. supply chains. To the extent that Canadian-made vehicles use American parts, they receive a reduction in the auto duty, but steel, aluminum and lumber get no such break.

Other U.S. trading partners, with the exception of Mexico, have no USMCA protections.

Last Friday, Canada-U.S. Trade Minister Dominic LeBlanc said talks will continue with the Americans, but that he was leaving Washington after a long period of intense negotiations, and that no progress was likely in the coming days.

Canada has breathing room because of the USMCA, and so does Mexico. It got a 90-day extension on negotiations, with no new tariffs, on the same day as Canada was hit with the 35-per-cent levy.

The USMCA has allowed Ottawa to rag the puck, and to avoid caving in to Washington’s demands as quickly as other trading partners. Time may work in Canada’s favour. The 35-per-cent tariff, whose legal excuse is that Canada is flooding the U.S. with fentanyl, is likely to be struck down by the U.S. courts, though that won’t happen quickly. Negative economic news – a small helping of which arrived last week – could lead the American public and business to push back more forcefully against Trump’s tariff plans.

The USMCA has been a shield for Canada, but it is up for renegotiation next year. Trump could also walk away with six months notice.

The Canadian economy is holding up, but there are many unknowns: Does Trumpenomics’ vision for the future include a North American trading bloc, with Canada benefiting from lower tariffs than the rest of the world? Or does Trump want to subject Canada to the same tariffs as the rest of the world, which would sever continental automobile supply chains, while reducing most other exports?

We are about to find out.

ChartedThe Canadian economy limps alongOpen this photo in gallery:

With the U.S., it’s never-ending tariff drama. But now, the lack of a deal extends the months-long stretch of extreme uncertainty, which is weighing on businesses and consumers. Many companies have paused investment and hiring plans, and consumers are holding off on big purchases, until the trade landscape becomes clearer. These are the current tariffs between Canada and the U.S. since the latest deadline passed.

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Morning update

Global markets were on the rise as expectations for the U.S. Federal Reserve’s interest rate cuts grew, while investors assessed a new round of major corporate earnings.

Wall Street futures were in positive territory after yesterday’s rally. TSX futures pointed higher after Canada’s main stock market was closed yesterday for a holiday.

Overseas, the pan-European STOXX 600 was up 0.463 per cent in morning trading. Britain’s FTSE 100 gained 0.49 per cent, Germany’s DAX advanced 0.78 per cent and France’s CAC 40 added 0.26 per cent.

In Asia, Japan’s Nikkei closed 0.64 per cent higher, while Hong Kong’s Hang Seng rose 0.68 per cent.

The Canadian dollar traded at 72.43 U.S. cents.